Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/338084 
Authors: 
Year of Publication: 
2026
Series/Report no.: 
EIB Working Papers No. 2026/04
Publisher: 
European Investment Bank (EIB), Luxembourg
Abstract: 
Compared with the relatively straightforward definition of a default event, assessing sovereign debt sustainability remains a grey area. The interaction between fiscal choices, lenders' expectations and economic uncertainty creates a setting in which-particularly when a default looms-anticipation and coordination can matter as much as analysing economic fundamentals. To explore these rich debt dynamics, we develop a parsimonious model in which a government repeatedly makes fiscal and default decisions, while lenders demand bond yields that compensate for default risk. The model sheds light on when and why governments demonstrate fiscal prudence or even build fiscal buffers. It also illustrates how lenders' beliefs, by selecting the equilibrium outcome, can constrain a government's ability to issue debt-highlighting the influence of actors such as credit rating agencies that help form these beliefs. Notably, besides debt levels and lenders' expectations, the maturity profile of debt emerges endogenously as a key dimension of debt sustainability. Finally, we examine the role of supranational lenders in the international financial architecture. We find that well-designed financial support, whether to avoid crises or remedy the underprovision of commercial lending, constitutes a distinct class of debt, while markets still impose fiscal discipline on the sovereign.
Subjects: 
Sovereign default
Self-fulfilling crises
Safe assets
Supranational lending
JEL: 
F33
F34
G12
H63
Persistent Identifier of the first edition: 
ISBN: 
978-92-861-6166-7
Document Type: 
Working Paper

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