Professors Viral V Acharya and Raghuram G Rajan’s paper, “Sovereign debt, government myopia and the financial sector” won the NSE best paper award presented during the Summer Research Conference 2012 organised by the Centre for Analytical Finance (CAF) at the ISB. In this article, Professor Acharya presents a summary of their award-winning paper.
Why do governments repay external sovereign borrowing? Models where countries ser vice their external debt for fear of being excluded from capital markets for a sustained period seem ver y persuasive, yet are at odds with the fact that defaulters seem to be able to return to borrowing in international capital markets after a short while. With sovereign debt in industrial countries at extremely high levels, understanding why sovereigns repay foreign creditors, and what their debt capacity might be, is an important concern for policy makers and investors around the world.