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Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment

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  • Rohan Pitchford
  • Mark L. J. Wright

Abstract

Why is it difficult to restructure sovereign debt in a timely manner? In this paper, we present a theory of the sovereign debt-restructuring process in which delay arises as individual creditors hold up a settlement in order to extract greater payments from the sovereign. We then use the theory to analyse recent policy proposals aimed at ensuring equal repayment of creditor claims. Strikingly, we show that such collective action policies may increase delay by encouraging free riding on negotiation costs, even while preventing hold-up and reducing total negotiation costs. A calibrated version of the model can account for observed delays and finds that free riding is quantitatively relevant: whereas in simple low-cost debt-restructuring operations, collective mechanisms will reduce delay by more than 60%, in high-cost complicated restructurings, the adoption of such mechanisms results in a doubling of delay. Copyright 2012, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 2 ()
Pages: 812-837

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Handle: RePEc:oup:restud:v:79:y:2012:i:2:p:812-837

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Citations

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Cited by:
  1. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," CDMA Working Paper Series 201015, Centre for Dynamic Macroeconomic Analysis.
  2. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
  3. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," NBER Working Papers 18855, National Bureau of Economic Research, Inc.
  4. Yan Bai & Jing Zhang, 2009. "Duration of Sovereign Debt Renegotiation," Working Papers 593, Research Seminar in International Economics, University of Michigan.
  5. Jeromin Zettelmeyer & Marcos Chamon & Ran Bi, 2011. "The Problem that Wasn't," IMF Working Papers 11/265, International Monetary Fund.
  6. Das, Udaibir S. & Papaioannou, Michael G. & Trebesch, Christoph, . "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," Chapters in Economics, University of Munich, Department of Economics.
  7. Ugo Panizza, 2013. "Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion," IHEID Working Papers 03-2013, Economics Section, The Graduate Institute of International Studies.
  8. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers 12/203, International Monetary Fund.
  9. Demian Pouzo & Ignacio Presno, 2012. "Sovereign default risk and uncertainty premia," Working Papers 12-11, Federal Reserve Bank of Boston.
  10. Ignacio Presno & Demian Pouzo, 2012. "Sovereign Default Risk and Uncertainty Premia," 2012 Meeting Papers 608, Society for Economic Dynamics.

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