Motivated by the recent European debt crisis, this paper investigates the scope for a
bailout guarantee in a sovereign debt crisis. Defaults may arise from negative income
shocks, government impatience or a "sunspot"-coordinated buyers strike. We introduce a
bailout agency, and characterize the minimal actuarially fair intervention that guarantees
the no-buyers-strike fundamental equilibrium, relying on the market for residual
financing. The intervention makes it cheaper for governments to borrow, inducing them
borrow more, leaving default probabilities possibly rather unchanged. The maximal
backstop will be pulled precisely when fundamentals worsen.
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