Compared with the relatively straightforward definition of a default event, assessing sovereign debt sustainability remains a grey area. The interaction between fiscal choices, lenders’ expectations and economic uncertainty creates a setting in which—particularly when a default looms—anticipation and coordination can matter as much as analysing economic fundamentals. To explore these rich debt dynamics, we develop a parsimonious model in which a government repeatedly makes fiscal and default decisions, while lenders demand bond yields that compensate for default risk. The model sheds light on when and why governments demonstrate fiscal prudence or even build fiscal buffers […]