Working Paper: CEPR ID: DP3729
Authors: Sayantan Ghosal; Marcus Miller
Abstract: We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor?s incentives leads to excessive ?rollover failure? by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures, involving ?contractibility? of sovereign debtor?s payoffs, suspension of convertibility in a ?discovery? phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF?s Sovereign Debt Restructuring Mechanism than the Collective Action Clauses which some promote as an alternative.
Keywords: Creditor Coordination; International Financial Architecture; Moral Hazard; Sovereign Debt Restructuring
JEL Codes: F02; F30; F33; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debtor's moral hazard (G33) | Excessive crises (H12) |
| Creditor behavior (G32) | Crisis incidence (H12) |
| Debtor's incentive problem (G33) | Excessive project terminations by creditors (G33) |
| Lack of institutional reforms (O17) | Prone to financial crises (G01) |
| Creditor coordination + Debtor incentives (G33) | Excessive crises (H12) |