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Structuring and Restructuring Sovereign Debt: The Role of Seniority

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  • Patrick Bolton
  • Olivier Jeanne

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11071.

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Date of creation: Jan 2005
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Publication status: published as Patrick Bolton & Olivier Jeanne, 2009. "Structuring and Restructuring Sovereign Debt: The Role of Seniority-super-1," Review of Economic Studies, Blackwell Publishing, vol. 76(3), pages 879-902, 07.
Handle: RePEc:nbr:nberwo:11071

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Cited by:
  1. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
  2. Barry Eichengreen & Kenneth Kletzer & Ashoka Mody, 2005. "The IMF in a World of Private Capital Markets," NBER Working Papers 11198, National Bureau of Economic Research, Inc.
  3. 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.
  4. Diego Saravia, 2009. "On The Role and Effects of IMF Seniority," Working Papers Central Bank of Chile 538, Central Bank of Chile.
  5. 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.
  6. Garima Vasishtha, 2007. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Working Papers 07-33, Bank of Canada.
  7. Patrick Bolton & Olivier Jeanne, 2007. "Structuring and Restructuring Sovereign Debt," IMF Working Papers 07/192, International Monetary Fund.
  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. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
  10. Irwin, Gregor & Thwaites, Gregory, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
  11. 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.

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