Working Paper: NBER ID: w2088
Authors: Jeremy I. Bulow; Kenneth Rogoff
Abstract: Few sovereign debtors have repudiated their obligations entirely. But despite the significant sanctions at the disposal of lenders, many borrowers have been able to consistently negotiate for reduced repayments. This paper presents a model of the on-going bargaining process that determines repayment levels. We derive a bargaining equilibrium in which countries with large debts achieve negotiated partial default. The ability to credibly threaten more draconian penalties in the event of repudiation may be of no benefit to lenders. Furthermore, unanticipated increases in world interest rates may actually help the borrowers by making lenders more inpatient for a negotiated settlement. Finally, Western governments may be induced to make payments to facilitate reschedulings even though efficient agreements will be reached without their intervention.
Keywords: Sovereign Debt; Negotiation; Partial Default; Bargaining Model
JEL Codes: F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bargaining dynamics (C79) | negotiated partial defaults (G33) |
| world interest rates (E43) | repayments (G51) |
| banks' penalties (G21) | negotiation process (C78) |
| U.S. government intervention (N42) | rescheduling agreements (C78) |