IS SOVEREIGN DEBT RESISTANCE OVERCOMING A PREMISE OF SOVEREIGN DEFAULT PATH DEPENDENCE OCCURENCE?

Abstract

The main aim of the article is to analyze the interconnection between sovereign debt resilience and sovereign default path dependence with its application for Ukrainian economy. There were system dynamics methods used in this research with the simulation using Polya process probability (Polya urn). We used the statistical data base of the Ukrainian economy and fundamental works in system dynamics and sovereign debt analysis. We examine in the article the problem of overcoming existing sovereign debt mental model resilience to external and internal shocks in a situation of uncertainty and the issue of the appropriate instruments for sovereign debt resilience conceptual analysis application. The causal loops diagrams are used to demonstrate the main effects arising under the policy dilemma conducting of sovereign debt default or its repayment. Among the main consequences of not overcoming the existing mental model is 1) the obsolete sovereign debt management financial structure of the society management method (The Deming cycle is used according to the scheme: "Plan - work - check - activity", or "Plan - execution - check - adjustment" to explain the existing principle of sovereign debt service.) 2) foreign direct investment decreasing versus external debt decreasing, which slows down the process of economic development 3) The disproportion between national savings and investment 4) The absence of the resistance in sovereign debt policy mechanism. The author highlights, that under Pola process the system does not lock in to possible balance - we are not observing the uniform distribution of the proportion of sovereign defaults. Positive feedback loops are overlapped by undetermined negative one. Polya process in a case of the sovereign default versus debt repayment with the appropriate density function for sovereign default probability after 29 years (trials) has been used to demonstrate the nonlinearity processes of the appropriate policy choice. The main conclusion is that the equilibrium distribution of the Polya process is not quite uniform. We are observing a locally unstable disequilibrium with the positive feedback but impossibility to lock in in a certain point.