The secured creditor control in the resolution of distress in small businesses can have two effects: it can reduce the ex-post cost of financial distress but, on the other hand, secured creditors and business owners may collude to divert value from junior creditors. This concern has been...

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign...