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Duration of Sovereign Debt Renegotiation

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  • Yan Bai

    (Arizona State University)

  • Jing Zhang

    (University of Michigan)

Abstract

The structure of sovereign debt has evolved over time from illiquid bank loans toward liquid bonds that are traded on the secondary market in the past two decades. This change in the debt structure is accompanied with a reduction in the duration of sovereign debt renegotiation; it takes on average 9 years to restructure bank loans, but only 1 year to restructure bonds. In this work, we argue that the secondary market plays an important role -- information revelation -- in reducing the renegotiation length. We construct a dynamic bargaining game between the government and the creditors with private information on the creditors' reservation value. The government uses costly delays as a screening device for the creditors' type, and so the delays arise in equilibrium. Moreover, the more severe is the private information, the longer the delays are. When we introduce the secondary market, the equilibrium delays are greatly reduced. This is because the secondary market price conveys information about the creditors' reservation and lessens the information friction. We also find that bond financing is more friendly to the debtor country; it increases ex-ante borrowing and investment and ex-post renegotiation welfare of the government.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers576-600/r593.pdf
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Bibliographic Info

Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 593.

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Length: 28 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:mie:wpaper:593

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Postal: ANN ARBOR MICHIGAN 48109
Web page: http://www.fordschool.umich.edu/rsie/
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Keywords: sovereign debt renegotiation; secondary bond markets; dynamic bargaining; incomplete information;

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References

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Citations

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Cited by:
  1. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers 2010-100, Scottish Institute for Research in Economics (SIRE).
  2. Fernando Broner & Aitor Erce & Alberto Martín & Jaume Ventura, 2013. "Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out Effects," Working Papers 701, Barcelona Graduate School of Economics.
  3. Fernando Broner & Aitor Erce & Alberto Martin & Jaume Ventura, 2013. "Sovereign Debt Markets in Turbulent Times: Creditor Discrimination and Crowding-Out," IMF Working Papers 13/270, International Monetary Fund.
  4. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
  5. Grey Gordon & Pablo Guerrón-Quintana, 2013. "Dynamics of investment, debt, and default," Working Papers 13-18, Federal Reserve Bank of Philadelphia.
  6. Mark Aguiar & Manuel Amador, 2013. "Sovereign Debt: A Review," NBER Working Papers 19388, National Bureau of Economic Research, Inc.

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