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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.

Debts, Public --- Aggregate Factor Income Distribution --- Capital market --- Debt default --- Debt Management --- Debt --- Debts, External --- Economic & financial crises & disasters --- Exports and Imports --- External debt --- Finance --- Finance: General --- Financial Crises --- Financial crises --- Financial markets --- Financial Risk Management --- General Financial Markets: General (includes Measurement and Data) --- Income --- International economics --- International Lending and Debt Problems --- Macroeconomics --- National accounts --- Open Economy Macroeconomics --- Public debt --- Public finance & taxation --- Public Finance --- Securities markets --- Sovereign Debt --- Greece