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Holdouts In Sovereign Debt Restructuring: A Theory Of Negotiation In A Weak Contractual Environment

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  • Rohan Pitchford
  • Mark L. J. Wright

Abstract

Negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement. The country cannot borrow internation- ally until it settles with all creditors. Delay arises in equilibrium as creditors engage in strategic hold-up. The model affirms the conventional wisdom that delay increases with more creditors, and with the advent of "vulture" creditors. Contrary to conventional wisdom, putting collective ac- tion clauses into bond contracts may increase delay via free-riding on negotiation costs, even while preventing strategic holdup and reducing total negotiation costs. Secondary debt markets consoli- date debt with high - and disperse debt with low - creditor bargaining power. Whether secondary markets reduce or increase delay, depends on the interaction between strategic holdup and debt consolidation effects. The analysis contributes to the theory of multi-player dynamic timing games through a general treatment of the comparative dynamics used to answer key applied questions about sovereign debt negotiation.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-37.

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Length: 60 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:een:camaaa:2008-37

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Citations

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Cited by:
  1. Demian Pouzo & Ignacio Presno, 2012. "Sovereign default risk and uncertainty premia," Working Papers, Federal Reserve Bank of Boston 12-11, Federal Reserve Bank of Boston.
  2. Bai, Yan & Zhang, Jing, 2012. "Duration of sovereign debt renegotiation," Journal of International Economics, Elsevier, Elsevier, vol. 86(2), pages 252-268.
  3. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," NBER Working Papers 18855, National Bureau of Economic Research, Inc.
  4. Das, Udaibir S. & Papaioannou, Michael G. & Trebesch, Christoph, . "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," Chapters in Economics, University of Munich, Department of Economics, University of Munich, Department of Economics.
  5. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," Discussion Paper Series, Department of Economics, Department of Economics, University of St. Andrews 201004, Department of Economics, University of St. Andrews.
  6. Jeromin Zettelmeyer & Marcos Chamon & Ran Bi, 2011. "The Problem that Wasn't," IMF Working Papers, International Monetary Fund 11/265, International Monetary Fund.
  7. Ignacio Presno & Demian Pouzo, 2012. "Sovereign Default Risk and Uncertainty Premia," 2012 Meeting Papers, Society for Economic Dynamics 608, Society for Economic Dynamics.
  8. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers, International Monetary Fund 12/203, International Monetary Fund.
  9. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2010-100, Scottish Institute for Research in Economics (SIRE).
  10. Ugo Panizza, 2013. "Do We Need a Mechanism for Solving Sovereign Debt Crises? A Rule-Based Discussion," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 03-2013, Economics Section, The Graduate Institute of International Studies.
  11. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 29(4), pages 649-667, WINTER.

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