Debt dilution and seniority in a model of defaultable sovereign debt
AbstractAn important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both theoretically and quantitatively, the extent to which seniority can mitigate the debt dilution problem.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-14.
Date of creation: 2012
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Avoiding sovereign debt dilution with debt seniority
by Economic Logician in Economic Logic on 2012-07-10 14:04:00
by himaginary in himaginaryの日記 on 2012-07-12 07:00:00
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