Recent empirical contributions show that emerging markets tend to issue mainly short-term debt, even if this increases the country's exposure to liquidity crises. This paper proposes a theoretical model to explain under which conditions issuing short-term debt can be the best choice for a country and its international lenders. Sovereign crisis management tools are then discussed to determine whether they can modify the optimal debt maturity structure.
The optimal debt contract between a country and its lenders imposes a limit on the amount of long-term debt, which derives from the impossibility of the country to guarantee in advance that it will not dilute these obligations. Any change in the debt contract to include the possibility of sovereign debt restructuring and/or the intervention of an international institution has an impact on the cost of the issued debt; however, these crisis management tools are unable to loosen the constraint on long-term debt issuance.