IMF Working Papers

Sovereign Debt Auctions with Strategic Interactions

By Ricardo Alves Monteiro, Stelios Fourakis

July 25, 2025

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Format: Chicago

Ricardo Alves Monteiro, and Stelios Fourakis. "Sovereign Debt Auctions with Strategic Interactions", IMF Working Papers 2025, 151 (2025), accessed July 31, 2025, https://doi.org/10.5089/9798229018142.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In this paper, we build a model of sovereign borrowing and default, disciplined with proprietary bid level data, to study the impact that alternative ways of issuing sovereign debt have on borrowing decisions, the cost of debt, and welfare. We focus on the two most common types of auctions used for sovereign debt issuances: uniform and discriminatory price auctions. We calibrate the model to the Portuguese economy and find that the type of auction used has quantitative implications. In particular, discriminatory auctions generate spreads that provide a better fit to the data. In a counterfactual, we find that switching to a uniform protocol constitutes a Pareto improvement, and that the difference in welfare is highest during crises (0.6 percent of permanent consumption). Finally, we find that accounting for dynamic effects is crucial. In a single auction setting, a risk averse government prefers the discriminatory protocol. However, with repeated auctions, the properties of the discriminatory protocol incentivize over-borrowing. The anticipatory effect it has on prices makes the uniform protocol a better option.

Subject: Debt default, Expenditure, External debt, Financial institutions, Public debt, Treasury bills and bonds

Keywords: Debt default, Debt financing, Default risk, Dilution, Discretion, Sovereign debt auctions, Treasury bills and bonds

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