Working Paper: NBER ID: w11071
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: No keywords provided
JEL Codes: F3; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereigns design debt structures that are difficult to restructure (F34) | Enhance likelihood of repayment (G51) |
| Difficult to restructure debt structures (G32) | Mitigate sovereign's incentive to repudiate debts (H63) |
| Competition among lenders for repayment (G21) | Excessively difficult to restructure sovereign debt (F34) |
| Absence of enforceable seniority (J58) | Sovereigns tempted to issue new debt (H63) |
| Sovereigns tempted to issue new debt (H63) | Dilute existing debt claims (G33) |
| Policy interventions enforcing priority covenants (F55) | Improve ex ante and ex post efficiency in sovereign debt markets (H63) |