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Beneficial Delays in Debt Restructuring Negotiations

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  • Ran Bi
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    Abstract

    Delays in debt restructuring negotiations are widely regarded as inefficient. This paper argues that delays can allow the economy to recover from a crisis, make more resources available for debt settlement, and enable the negotiating parties to enjoy a larger "cake". Within this context, therefore, delays may be "beneficial". This paper explores this idea by constructing a dynamic model of sovereign default in which debt renegotiation is modeled as a stochastic bargaining game based on Merlo and Wilson''s (1995) framework. Quantitative analysis shows that this model can generate an average delay length comparable to that experienced by Argentina in its most recent debt restructuring.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/38.

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    Length: 29
    Date of creation: 01 Feb 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/38

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    Keywords: Debt restructuring; Sovereign debt; debt renegotiation; bond; bond spreads; sovereign default; bonds; risk-free interest rate; debt renegotiations; debt service; debt reduction; present value; current account; debt renegotiation process; repayments; sovereign bonds; debt settlement; international capital; international capital markets; sovereign debt restructuring; debt renegotiation processes; debt holders; debt holder; bond spread; sovereign bond; amount of debt; short-term debt; long-term debt; reserve bank; debt settlements; sovereign debt crises; zero-coupon bonds; debt data; moral hazard; coupon bonds; denominated bonds; debt crises; international debt; debt burden; discount bond; bond prices; debt restructuring procedures; international lending; debt intolerance;

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    5. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
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    9. Barry Eichengreen & Kenneth Kletzer, 2003. "Crisis Resolution: Next Steps," NBER Working Papers 10095, National Bureau of Economic Research, Inc.
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    13. Merlo, Antonio & Wilson, Charles A, 1995. "A Stochastic Model of Sequential Bargaining with Complete Information," Econometrica, Econometric Society, Econometric Society, vol. 63(2), pages 371-99, March.
    14. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 371-96, March.
    15. Enrique G. Mendoza & Katherine A. Smith, 2002. "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon," NBER Working Papers 9286, National Bureau of Economic Research, Inc.
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    18. Kenneth Kletzer & Barry J. Eichengreen & Ashoka Mody, 2003. "Crisis Resolution," IMF Working Papers 03/196, International Monetary Fund.
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    20. repec:rus:hseeco:123922 is not listed on IDEAS
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    Cited by:
    1. Enrique G. Mandoza & Vivian Z. Yue, 2008. "A solution to the default risk-business cycle disconnect," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 924, Board of Governors of the Federal Reserve System (U.S.).
    2. Yan Bai & Jing Zhang, 2009. "Duration of Sovereign Debt Renegotiation," Working Papers, Research Seminar in International Economics, University of Michigan 593, Research Seminar in International Economics, University of Michigan.
    3. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 47(3), pages 651-98, September.
    4. 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.
    5. Dias, Daniel A. & Richmond, Christine & Wright, Mark L. J., 2014. "The Stock of External Sovereign Debt: Can We Take the Data at ‘Face Value’?," Working Paper Series, Federal Reserve Bank of Chicago WP-2014-5, Federal Reserve Bank of Chicago.
    6. Popov, Sergey V. & Wiczer, David G., 2009. "Equilibrium sovereign default with endogenous exchange rate depreciation," MPRA Paper 18854, University Library of Munich, Germany.
    7. Antonio Merlo & Xun Tang, 2009. "Identification of Stochastic Sequential Bargaining Models," PIER Working Paper Archive 09-037, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    8. Enrique G. Mendoza & Vivian Z. Yue, 2008. "A Solution to the Disconnect between Country Risk and Business Cycle Theories," NBER Working Papers 13861, National Bureau of Economic Research, Inc.

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