Observing bailout expectations during a total eclipse of the sun

Exploiting an exceptional historical example, this paper proposes an original method to address the existence of sovereign creditor moral hazard. As the coronas which are observable only during a total eclipse of the sun, market-specific prices of repudiated bonds are observable only when extreme conditions (a war, in this instance) segment the markets. Such events are very rare but insightful as they allow for isolating pure country-specific bailout expectations. The paper shows that bailouts do indeed create creditor moral hazard. Based on an impulse response analysis, the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation.