Chapter

Reasons for Limited Sovereign Risk Management and How to Improve it

Stijn Claessens

in Overcoming Developing Country Debt Crises

Published in print February 2010 | ISBN: 9780199578788
Published online May 2010 | e-ISBN: 9780191723049 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199578788.003.0003

Series: Initiative for Policy Dialogue

Reasons for Limited Sovereign Risk Management and How to Improve it

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This chapter analyzes whether governments actually tend to borrow excessively and not take the steps needed to protect themselves from debt distress, noting that there are direct outlays and opportunity costs in any effort to mitigate risk. Drawing on both the economic theory of contracts and practical experience, it concludes that the problem is not so much that sovereign debtors borrow too much but that they have to bear too much of the risk of external borrowing. It thus calls for additional—albeit not unlimited—risk sharing with creditors. The chapter observes that governmental authorities in developed countries that face high degrees of international volatility do not regularly use hedging instruments, from which he concludes that lack of access to them at reasonable cost is not the only issue that limits their use in developing countries.

Keywords: sovereign risk management; developing countries; government demand

Chapter.  9638 words. 

Subjects: Macroeconomics and Monetary Economics

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