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Sovereign Debt, Reputation, and Credit Terms

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  • Jonathan Eaton

Abstract

I develop a model in which sovereign debtors repay debt in order to maintain a reputation for repayment. Repayment gives creditors reason to think that the debtor will suffer adverse consequences if it defaults, so they continue to lend. I compare a situation in which competitive lenders earn a zero profit on each loan with one in which they can make long-term commitments to individual borrowers, so that the zero-profit condition applies only in the long run. In many circumstances a borrower benefits, ex ante, if lenders commit to denying credit to a borrower in default even if at that point a subsequent loan is profitable. Furthermore, a "debt overhang," while possibly altering credit terms, does not cause profitable investment opportunities to go unexploited.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3424.

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Date of creation: Aug 1990
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Publication status: published as International Journal of Finance and Economics, Vol. 1, No. 1, pp.25-35 (January 1996).
Handle: RePEc:nbr:nberwo:3424

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  1. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 1069-89, July.
  2. Jeremy Bulow & Kenneth Rogoff, 1998. "Sovereign Debt: Is to Forgive to Forget," Levine's Working Paper Archive 209, David K. Levine.
  3. Timothy J. Kehoe & David K. Levine, 1992. "Debt constrained asset markets," Working Papers, Federal Reserve Bank of Minneapolis 445, Federal Reserve Bank of Minneapolis.
  4. Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, Elsevier, vol. 30(3), pages 481-513, June.
    • Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc.
  5. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, American Economic Association, vol. 78(5), pages 1088-97, December.
  6. Cole, Harold L & Dow, James & English, William B, 1995. "Default, Settlement, and Signalling: Lending Resumption in a Reputational Model of Sovereign Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 365-85, May.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, American Economic Association, vol. 73(5), pages 912-27, December.
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Cited by:
  1. Rose, Andrew K & Spiegel, Mark, 2006. "Non-Economic Engagement and International Exchange: The Case of Environmental Treaties," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5942, C.E.P.R. Discussion Papers.
  2. Luis A. V. Catao & Ana Fostel & Sandeep Kapur, 2008. "Persistent Gaps and Default Traps," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 0803, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Martinelli, Cesar, 1997. "Small firms, borrowing constraints, and reputation," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 33(1), pages 91-105, May.
  4. Fløgstad, Cathrin N. & Nordtveit, Ingvild, 2014. "Lending to developing countries: How do official creditors respond to sovereign defaults?," Working Papers in Economics, University of Bergen, Department of Economics 01/14, University of Bergen, Department of Economics.
  5. Federico Sturzenegger and Jeromin Zettelmeyer, 2006. "Has the Legal Threat to Sovereign Debt Restructuring Become Real?," Business School Working Papers, Universidad Torcuato Di Tella legalthreat, Universidad Torcuato Di Tella.
  6. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers 09/29, International Monetary Fund.
  7. Cesar Martinelli, 2001. "Essays on Political Economy of Political Reform," Levine's Working Paper Archive 625018000000000135, David K. Levine.
  8. Kletzer, Kenneth M. & Wright, Brian D., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt4qg3c42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  9. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2010. "International Government Debt," Business School Working Papers, Universidad Torcuato Di Tella 2010-03, Universidad Torcuato Di Tella.
  10. Levine, David K. & Martinelli, Cesar, 1998. "Reputation with Noisy Precommitment," Journal of Economic Theory, Elsevier, Elsevier, vol. 78(1), pages 55-75, January.
  11. Romain Ranciere & Ana Fostel & Luis Catao, 2011. "Sudden Stops and Sovereign Defaults," 2011 Meeting Papers 1359, Society for Economic Dynamics.
  12. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
  13. Dhillon Amrita, & García-Fronti Javier & Zhang Lei, 2009. "Sovereign Debt Default : The Impact of Creditor Composition," The Warwick Economics Research Paper Series (TWERPS) 901, University of Warwick, Department of Economics.
  14. Claudio Borio & Frank Packer, 2004. "Assessing new perspectives on country risk," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, December.
  15. Peter Benczur & Cosmin Ilut, 2011. "Evidence for Dynamic Contracts in Sovereign Bank Lending," Working Papers, Duke University, Department of Economics 11-06, Duke University, Department of Economics.

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