Advanced Search
MyIDEAS: Login to save this article or follow this journal

Conditionality covenants: Commitment versus discretion in sovereign credit contracts

Contents:

Author Info

  • Sherif Khalifa

    (California State University, Fullerton, USA)

Registered author(s):

    Abstract

    This paper investigates the impact of imposing conditionality covenants on the performance of the signatories to a sovereign credit contract. A two period model is developed in which creditors provide a loan to a sovereign conditional upon the implementation of investments. Commitment to these covenants overcome the debt repudiation problem, as it increases the likelihood of repayment, if the implemented conditionalities contribute to an increase in the sovereign's productive capacity. A three period model is also developed to entertain the possibility that the sovereign engage in credit activities in subsequent periods, where in the final period the debtor has obligations towards junior and senior creditors. This allows for dynamic inconsistency, as the sovereign may be tempted to increase its debt in the second period, thus increasing the probability of repudiation in the third period. Imposing conditionality covenants by senior creditors that increase the portion they can appropriate in case of repudiation, relative to junior creditors, reduces the supply of credit by junior creditors in the second period and thus overcomes the debt dilution problem. Copyright © 2009 John Wiley & Sons, Ltd.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://hdl.handle.net/10.1002/jid.1576
    File Function: Link to full text; subscription required
    Download Restriction: no

    Bibliographic Info

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

    Volume (Year): 22 (2010)
    Issue (Month): 4 ()
    Pages: 411-423

    as in new window
    Handle: RePEc:wly:jintdv:v:22:y:2010:i:4:p:411-423

    Contact details of provider:
    Web page: http://www3.interscience.wiley.com/journal/5102/home

    Related research

    Keywords:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    2. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
    3. Alex Mourmouras & Peter Rangazas, 2004. "Conditional Lending Under Altruism," IMF Working Papers 04/100, International Monetary Fund.
    4. Patrick Bolton & Olivier Jeanne, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," NBER Working Papers 11071, National Bureau of Economic Research, Inc.
    5. Wolfgang Mayer & Alex Mourmouras, 2005. "On the Viability of Conditional Assistance Programs," IMF Working Papers 05/121, International Monetary Fund.
    6. Bulow, Jeremy & Rogoff, Kenneth S., 1989. "A Constant Recontracting Model of Sovereign Debt," Scholarly Articles 12491028, Harvard University Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wly:jintdv:v:22:y:2010:i:4:p:411-423. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.