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Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime

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  • 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 ex post. We show, however, that competition for repayment between lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring. (c) 2007 by The University of Chicago. All rights reserved..

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 115 (2007)
Issue (Month): 6 (December)
Pages: 901-924

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Handle: RePEc:ucp:jpolec:v:115:y:2007:i:6:p:901-924

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References

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  1. Barry Eichengreen, 2003. "Restructuring Sovereign Debt," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 75-98, Fall.
  2. Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers 4901, C.E.P.R. Discussion Papers.
  3. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  4. Jeremy Bulow & Kenneth Rogoff, 1989. "Sovereign Debt Repurchases: No Cure for Overhang," NBER Working Papers 2850, National Bureau of Economic Research, Inc.
  5. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
  6. Andrei Shleifer, 2003. "Will the Sovereign Debt Market Survive?," American Economic Review, American Economic Association, vol. 93(2), pages 85-90, May.
  7. Bolton, Patrick & Scharfstein, David S, 1996. "Optimal Debt Structure and the Number of Creditors," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 1-25, February.
  8. Olivier Jeanne, 2004. "Debt Maturity and the International Financial Architecture," IMF Working Papers 04/137, International Monetary Fund.
  9. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  10. Hart, O. & Tirole, J., 1990. "Vertical Integration And Market Foreclosure," Working papers 548, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. Ilya Segal, 1999. "Contracting With Externalities," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 337-388, May.
  12. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  13. Bernheim, B Douglas & Whinston, Michael D, 1986. "Menu Auctions, Resource Allocation, and Economic Influence," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 1-31, February.
  14. Peter B. Kenen, 2001. "International Financial Architecture: What's New? What's Missing?, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 335, 1st quart.
  15. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-42, July.
  16. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-85, June.
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Cited by:
  1. Olivier Jeanne, 2009. "Debt Maturity and the International Financial Architecture," American Economic Review, American Economic Association, vol. 99(5), pages 2135-48, December.
  2. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  3. Yan Bai & Jing Zhang, 2009. "Duration of Sovereign Debt Renegotiation," Working Papers 593, Research Seminar in International Economics, University of Michigan.
  4. Bernardo Guimaraes, 2011. "Sovereign default: which shocks matter?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 553-576, October.
  5. Brown, Martin & Lane, Philip R., 2011. "Debt overhang in emerging Europe ?," Policy Research Working Paper Series 5784, The World Bank.
  6. Hallak, Issam, 2009. "Renegotiation and the pricing structure of sovereign bank loans: Empirical evidence," Journal of Financial Stability, Elsevier, vol. 5(1), pages 89-103, January.
  7. Andrew Ang & Francis A. Longstaff, 2011. "Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe," NBER Working Papers 16982, National Bureau of Economic Research, Inc.

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