O

Money  
t Debt Market

N
Pay Default
r  
t+1 I O
-­‐β  
Roll-­‐over Dump

N N

Pay Default Stuck Of:load

r  
I N O
-­‐β  
Pay Default

r  
I -­‐β  
t+2
 Probability  funcAons  of  a  sovereign  crisis  as  a  funcAon  of  debt  

γ=5  

γ=10  

γ=20  
B*=200  
r=10%  
β=1  
l0/B0=0.00001  
σ=10  

Level  of  debt  

 Probability  funcAons  of  a  sovereign  crisis  as  a  funcAon  of  debt  

Private  
informaAon-­‐only   γ=100  
outcome  
γ=∞  
  γ=50  

B*=200  
r=10%   γ=20  
β=1   Perfect  public  
l0/B0=0.001   informaAon  
γ=10  
σ=10   γ=0  
B*=Bmax  

Level  of  debt  

The  case  when  we  assume  y  is  sufficiently  large:  

Cost  of  future  

adjustment

Cost Default  cost

1  
l(B)  

l*  

B   Bmax   B*  
Level  of  debt
 Cost  of  future  
adjustment

Cost Default  cost

1  
l(B)  

r/(r+β)  
l*  

B   Bmax   B*  
Level  of  debt
 Cost  of  future  
adjustment

Default  cost

Cost

Willingness  
cutoff

Level  of  debt

 O
Money  
t Debt Market

N
Pay Default

t+1 I O
Roll-­‐over Dump

N N

Pay Default Stuck Of:load

I N O
Pay Default

I
t+2