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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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