Fiscal Policy

UK Sovereign Debt Default Risk (or the absence thereof)

A recent empirical paper by Paulo Mauro and Jing Zhou suggests that even when r – g < 0 (i.e. the interest cost of government debt is less than the growth rate of the economy), the risk of sovereign debt default may still be of concern for both advanced economies and emerging markets:

“Sovereign default histories demonstrate that after prolonged periods of low differentials, marginal rates can rise suddenly and sharply, shutting countries out of financial markets at short notice.”

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