Essays on Sovereign Debt Crisis

This thesis contains three chapters. The first one, which is the main one, investigates the role of lenders' expectations in propagating the Greek sovereign debt crisis within the Eurozone periphery. It documents which type of lenders contribute most to the spreading, provides a rationalization, and quantifies the effect on countries' default probabilities. Using data from Consensus Economics survey, I classify lenders according to their GDP forecast precision before the Greek sovereign debt crisis started. During the Greek crisis, the less precise lenders changed their forecast and portfolio against the rest of the Eurozone periphery more than the more precise ones. The rationalization with more empirical support is that less precise lenders present a stronger forecast correlation across Eurozone periphery countries' GDP than the more precise lenders. Thus, upon receiving news about Greece, the former update their forecast for the rest of the Eurozone periphery relatively more. I introduce this mechanism in an otherwise standard quantitative sovereign default model; in this economy, the country faces a price schedule almost 4 percent lower than in the rational lenders' benchmark. The second chapter is a joint work with Filippo de Marco. We analyze the role of expectations in bank lending in the context of an inflation increase. Banks that expect a higher inflation increase their lending to indebted companies with respect to banks that expect a lower inflation. The last chapter studies the contagion of the Tequila Crisis to Argentina through two countries’ endogenous default model, where countries’ fundamentals are correlated. International rational lenders incorporate a country’s debt decision to update their expectations about the other country’s fundamentals and, ultimately, its default probability