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Structuring and Restructuring Sovereign Debt: The Role of Seniority

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  • Bolton, Patrick
  • Jeanne, Olivier

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. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4901.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4901

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Keywords: collective action clause; debt dilution; seniority; sovereign debt; sovereign default;

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Citations

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Cited by:
  1. Diego Saravia, 2007. "On the Role and Effects of IMF Seniority," Documentos de Trabajo 317, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Sherif Khalifa, 2010. "Conditionality covenants: Commitment versus discretion in sovereign credit contracts," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 411-423.
  3. Irwin, Gregor & Thwaites, Gregory, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
  4. Ashoka Mody & Barry J. Eichengreen & Kenneth Kletzer, 2005. "The IMF in a World of Private Capital Markets," IMF Working Papers 05/84, International Monetary Fund.
  5. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sánchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
  6. Garima Vasishtha, 2010. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 1058-1074, November.
  7. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 812-837.
  8. Federico Sturzenegger and Jeromin Zettelmeyer, 2006. "Has the Legal Threat to Sovereign Debt Restructuring Become Real?," Business School Working Papers legalthreat, Universidad Torcuato Di Tella.
  9. Patrick Bolton & Olivier Jeanne, 2007. "Structuring and Restructuring Sovereign Debt," IMF Working Papers 07/192, International Monetary Fund.
  10. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  11. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
  12. Stephen Quinn, 2008. "Securitization of Sovereign Debt: Corporations as a Sovereign Debt Restructuring Mechanism in Britain, 1694-1750," Working Papers 200701, Texas Christian University, Department of Economics.

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