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Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures

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Ghosal, Sayantan
Miller, Marcus

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Abstract

We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor’s incentives leads to excessive ‘rollover failure’ by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures, involving ‘contractibility’ of sovereign debtor’s payoffs, suspension of convertibility in a ‘discovery’ phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF’s Sovereign Debt Restructuring Mechanism than the Collective Action Clauses which some promote as an alternative.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3729.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3729

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Related research
Keywords: creditor coordination; international financial architecture; moral hazard; sovereign debt restructuring;

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Find related papers by JEL classification:
F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General
F30 - International Economics - - International Finance - - - General
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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  1. Andrew G Haldane & Gregor Irwin & Victoria Saporta, . "Bail out or work out? Theoretical considerations," Bank of England working papers 219, Bank of England. [Downloadable!]
  2. Ilan Noy, 2004. "Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach," Working Papers 200402, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  3. José Wynne & Federico Weinschelbaum, 2004. "Renegotiation, Collective Action Clauses and Sovereign Debt Markets," Econometric Society 2004 Latin American Meetings 153, Econometric Society. [Downloadable!]
    Other versions:
  4. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany. [Downloadable!]
  5. Andrew G Haldane & J"rg Scheibe, . "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England. [Downloadable!]
  6. Miller, Marcus & Thampanishvong, Kannika & Zhang, Lei, 2003. "Learning to Forget? Contagion and Political Risk in Brazil," CEPR Discussion Papers 3785, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Jochen R. Andritzky, 2004. "Implied Default Probabilities and Default Recovery Ratios: An Analysis of Argentine Eurobonds 2000-2002," Econometric Society 2004 Far Eastern Meetings 500, Econometric Society. [Downloadable!]
  8. Alan Schwartz, . "A Normative Theory of Business Bankruptcy," American Law & Economics Association Annual Meetings 1037, American Law & Economics Association. [Downloadable!]
  9. Giancarlo Corsetti & Bernardo Guimaraes & Nouriel Roubini, 2003. "International Lending of Last Resort and Moral Hazard: A Model of IMF's Catalytic Finance," NBER Working Papers 10125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Aitor Erce-Domínguez, 2006. "Using standstills to manage sovereign debt crises," Banco de España Working Papers 0636, Banco de España. [Downloadable!]
  11. Miller, Marcus & Thomas, Dania, 2006. "Sovereign debt restructuring : the Judge, the vultures and creditor rights," The Warwick Economics Research Paper Series (TWERPS) 757, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
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