The Economics of Sovereign Debt and Default

"This third book is fairly technical, more so than the previous two. I think it’s fair to say that this is not a book for a general audience, as it contains a fair bit of advanced maths. It’s really at the frontier of research on the topic of sovereign debt. Think of this as a textbook aimed at advanced graduate students—that’s the audience that the authors have in mind, I think. It’s not a book to read before going to sleep unless you are very smart, but it’s very valuable. The book is a summary of a set of lectures that Mark Aguiar gave, based on his research and research on the topic more generally. If you want to have an idea of the research that people publishing in top journals are currently doing on issues of sovereign debt, this is a good book. It contains a nice overview of the questions researchers are asking, interesting facts researchers are trying to understand, and the explanations they’ve come up with. What are we trying to understand about sovereign debt markets? (I say ‘we’ because I am trying to make a little contribution to this research as well!). We’re trying to understand how governments borrow, when they borrow, how much they borrow, at what prices they borrow. We’re trying to understand the implications of this government borrowing and default risk for the business cycles in emerging markets or in countries where there is a sizeable amount of risky government debt. These are questions that used to be confined to emerging market economies, like Argentina or Brazil or Thailand. But with the European debt crisis, the same type of question started to be applied to countries such as Italy, which is where I come from. It’s a major economy in Europe, and so it’s interesting not just for Italians but for anyone who has an interest in advanced economies with large amounts of debt. A sovereign debt crisis in a country such as Italy would have large and severe repercussions on the wider global economy. In this book, Aguiar and Amador provide an overview of the state of the literature on the topic of sovereign debt in a very scientific way. It’s not a narrative story. They try and tell the story through data, as Reinhart and Rogoff do, but where Reinhart and Rogoff are really focused on the data and on descriptive statistics about financial crises, here the data is the motivation. ‘Here are some facts that we would like to understand.’ Then, the bulk of the analysis is on the mathematical theory, the mathematical models that researchers have developed to try and understand the behaviour of sovereign debt markets and the key facts that characterize those markets."