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Analytics of sovereign debt restructuring

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  • Andrew G Haldane
  • Adrian Penalver
  • Victoria Saporta
  • Hyun Song Shin

Abstract

Over the past few years there has been an active debate among policy-makers on appropriate mechanisms for restructuring sovereign debt, particularly international bonds. In this paper a simple theoretical model is developed to analyse the merits of these proposals. The analysis suggests that collective action clauses (CACs) can resolve the inefficiencies caused by intra-creditor coordination problems, provided that all parties have complete information about each others preferences. In such a world, statutory mechanisms are unnecessary. This is no longer the case, however, when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors. In this case, the inefficiencies induced by strategic behaviour the debtor-creditor bargaining problem cannot be resolved by the parties themselves: removing these inefficiencies would require the intervention of a third party.

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Paper provided by Bank of England in its series Bank of England working papers with number 203.

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Date of creation: Oct 2003
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Handle: RePEc:boe:boeewp:203

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  1. Giancarlo Corsetti & Amil Dasgupta & Stephen Morris & Hyun Song Shin, 2004. "Does One Soros Make a Difference? A Theory of Currency Crises with Large and Small Traders," Review of Economic Studies, Oxford University Press, vol. 71(1), pages 87-113.
  2. Michelle White, 2002. "Sovereigns in Distress: Do They Need Bankruptcy?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 287-320.
  3. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
  5. Hal S. Scott, 2002. "How Would a New Bankruptcy Regime Help?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 334-340.
  6. Andrei Shleifer, 2003. "Will the Sovereign Debt Market Survive?," American Economic Review, American Economic Association, vol. 93(2), pages 85-90, May.
  7. Nouriel Roubini, 2002. "Do We Need a New Bankruptcy Regime?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 321-333.
  8. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  9. Edwin M. Truman, 2002. "Debt Restructuring: Evolution or Revolution?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 341-349.
  10. Kenneth Kletzer, 2003. "Sovereign Bond Restructuring," IMF Working Papers 03/134, International Monetary Fund.
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