Working Paper: CEPR ID: DP11000
Authors: Sayantan Ghosal; Marcus Miller
Abstract: The presence of ?holdouts? in recent sovereign debt swaps poses a challenge to bargaining models which assume all creditors to be homogeneous. We modify the Rubinstein ?alternating offers? framework so as to accommodate exogenous creditor heterogeneity - specifically holdouts more patient than other bondholders.The ?second best? equilibrium derived is an initial offer and an associated ?lock-law? sufficient to tempt impatient creditors into a prompt bond exchange. This is followed by a delayed, but more generous, swap with the patient creditors, timed to take place when the lock-law expires. In practice, however, the presence of holdouts may be endogenous: they may be late-comers who buy distressed bonds with a view to litigating for the full face value plus their costs of waiting. Provisions for protecting other bond holders from the negative externality caused by such tactics are briefly discussed.However, where the judge has mandated good faith bargaining with holdout creditors, the bargaining outcome we derive may be useful to indicate a basis for compromise
Keywords: bargaining; delay; holdouts; lock law; second-best; sovereign debt restructuring
JEL Codes: C70; C78; F34; K00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| creditor heterogeneity (G51) | outcomes of sovereign debt restructuring (F34) |
| presence of holdouts (D86) | dynamics of negotiation (D74) |
| creditor patience (F34) | timing of debt swaps (F34) |
| creditor patience (F34) | outcomes of debt swaps (F34) |
| lock laws (K16) | engagement of impatient creditors in swaps (G33) |
| holdout's patience (D86) | timing and terms of the swap (F33) |
| debtor's knowledge of creditor types (F34) | bargaining process (C78) |
| creditor heterogeneity (G51) | multiple equilibria in outcomes (D59) |
| creditor patience (F34) | welfare implications (I30) |