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Sovereign Debt, Reputation and Credit Terms

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  • Eaton, Jonathan

Abstract

This paper develops a model in which sovereign debtors repay debt in order to maintain a reputation for repayment. Repayment gives creditors reason to think that the debtor will suffer adverse consequences if the debtor defaults, so they continue to lend. I compare a situation in which competitive lenders earn zero profit on each loan with one in which they can make long-term commitments to individual borrowers, so that the zero-profit condition applies only in the long run. In many circumstances, a borrower benefits ex ante if lenders commit to denying credit to a borrower in default even if, at that point, a subsequent loan is profitable. Furthermore, a "debt overhang," while possibly altering credit terms, does not cause profitable investment opportunities to go unexploited. Copyright @ 1996 by John Wiley & Sons, Ltd. All rights reserved.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 1 (1996)
Issue (Month): 1 (January)
Pages: 25-35

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Handle: RePEc:ijf:ijfiec:v:1:y:1996:i:1:p:25-35

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References

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  1. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Papers 411, Stockholm - International Economic Studies.
  2. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  3. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1986. "The Pure Theory of Country Risk," NBER Working Papers 1894, National Bureau of Economic Research, Inc.
  4. Harold L. Cole & James Dow & William B. English, 1994. "Default, settlement, and signalling: lending resumption in a reputational model of sovereign debt," Staff Report 180, Federal Reserve Bank of Minneapolis.
  5. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
  6. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
  7. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December.
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Cited by:
  1. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
  2. Federico Sturzenegger and Jeromin Zettelmeyer, 2006. "Has the Legal Threat to Sovereign Debt Restructuring Become Real?," Business School Working Papers legalthreat, Universidad Torcuato Di Tella.
  3. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2010. "International Government Debt," UNCTAD Discussion Papers 199, United Nations Conference on Trade and Development.
  4. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  5. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics 01/14, University of Bergen, Department of Economics.
  6. Andrew K. Rose & Mark M. Spiegel, 2006. "Non-economic engagement and international exchange: the case of environmental treaties," Working Paper Series 2006-33, Federal Reserve Bank of San Francisco.
  7. Luis A. V. Catao & Ana Fostel & Sandeep Kapur, 2008. "Persistent Gaps and Default Traps," Birkbeck Working Papers in Economics and Finance 0803, Birkbeck, Department of Economics, Mathematics & Statistics.
  8. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers 09/29, International Monetary Fund.
  9. David K. Levine & Cesar Martinelli, 1997. "Reputation with Noisy Precommitment," Levine's Working Paper Archive 1987, David K. Levine.
  10. Peter Benczur & Cosmin Ilut, 2011. "Evidence for Dynamic Contracts in Sovereign Bank Lending," Working Papers 11-06, Duke University, Department of Economics.
  11. Dhillon Amrita, & García-Fronti Javier & Zhang Lei, 2009. "Sovereign Debt Default : The Impact of Creditor Composition," The Warwick Economics Research Paper Series (TWERPS) 901, University of Warwick, Department of Economics.
  12. Claudio Borio & Frank Packer, 2004. "Assessing new perspectives on country risk," BIS Quarterly Review, Bank for International Settlements, December.
  13. Romain Ranciere & Ana Fostel & Luis Catao, 2011. "Sudden Stops and Sovereign Defaults," 2011 Meeting Papers 1359, Society for Economic Dynamics.
  14. Martinelli, Cesar, 1997. "Small firms, borrowing constraints, and reputation," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 91-105, May.
  15. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.

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