Haircuts on sovereign debt ‘open the door for more leverage’, research finds

Prolonged low interest rates also contribute to an overleveraged economy in case of crisis

centralbank-brazil
Working paper suggests haircuts on sovereign debt could open the door to more leverage

Haircuts on sovereign debt, despite reducing fiscal constraints, "open the door for more leverage", a working paper published by the Central Bank of Brazil suggests.

In Bargained Haircuts and Debt Policy Implications, Aloisio Araujo, Marcia Leon and Rafael Santos discuss the effects of a "popular supportive policy" in the aftermath of a sovereign crisis – haircuts resulting from debt negotiation.

The authors argue "expectations of haircuts in case of crisis" combined with prolonged low interest

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