Working Paper: CEPR ID: DP4901
Authors: Patrick Bolton; Olivier Jeanne
Abstract: In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts.
Keywords: collective action clause; debt dilution; seniority; sovereign debt; sovereign default
JEL Codes: F34; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign debt structuring (F34) | Efficiency of debt restructuring mechanisms (G33) |
| Design of sovereign debt (H63) | Efficiency of debt restructuring processes (G33) |
| Lack of a bankruptcy regime for sovereigns (F34) | Difficulty in restructuring debt (G32) |
| Sovereign lenders structuring claims (F34) | Likelihood of repayment (G33) |
| New debt issuance by sovereigns (H63) | Complication of restructuring efforts (G33) |
| Legal enforcement of seniority (M51) | Creation of seniority in sovereign debt (H63) |
| Sovereigns making debt harder to restructure (F34) | De facto creation of seniority (M51) |
| Inefficiencies in sovereign debt structures (H63) | Necessity of sovereign debt restructuring mechanism (F34) |
| Gresham's Law-like effect (E41) | Crowding out of better debt structures (G32) |