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Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut

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  • Kim Oosterlinck
  • Loredana Ureche-Rangau

Abstract

Sovereign debts are often subject to payment suspension. Default, i.e. the financial incapacity to fulfil the debt service, and repudiation, i.e. the denial by a sovereign to recognize its legal obligations, are normally used to explain these payment suspensions. Intuitively, for bondholders, defaults should incur the smallest financial losses. In this case, bondholders may indeed hope for either a negotiated solution (leading only to a partial loss), or for a resumption of the debt service if the defaulting state manages to overcome its financial troubles. In the case of repudiations, these two elements are not relevant as repudiations usually go with a complete stop of the negotiation process. Furthermore, when a country repudiates its debt, its pay-back ability does not matter as the debtor government refuses to fulfil its financial obligations. This paper shows, by using two series of bonds (Romanian bonds in default during the 1930’ and Russian bonds repudiated in 1918), that there are some situations when the market prices of repudiated bonds may stay above those of defaulted bonds. This counter-intuitive observation is explained by market anticipation of possible events having a strong influence on the repudiated bond prices (bail out of the Russian debt by the French Government or by a country created following the decline of the Tsarist Empire).

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/6693.

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Date of creation: 2005
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Publication status: Published in: Revue d'économie financière (2005) v.79,p.309-331
Handle: RePEc:ulb:ulbeco:2013/6693

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  1. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
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Cited by:
  1. Oscar Bernal Diaz & Kim Oosterlinck & Ariane Szafarz, 2009. "Observing bailout expectations during a total eclipse of the sun," DULBEA Working Papers 09-01.RS, ULB -- Universite Libre de Bruxelles.
  2. John Landon-Lane & Kim Oosterlinck, 2005. "Hope springs eternal… French bondholders and the Soviet Repudiation (1915-1919)," Departmental Working Papers 200513, Rutgers University, Department of Economics.
  3. Kim Oosterlinck & John Landon-lane, 2006. "Hope Springs Eternal – French Bondholders and the Soviet Repudiation (1915–1919)," Review of Finance, European Finance Association, vol. 10(4), pages 507-535, December.
  4. Marc D. Weidenmier & Kim Oosterlinck, 2007. "Victory or Repudiation? The Probability of the Southern Confederacy Winning the Civil War," NBER Working Papers 13567, National Bureau of Economic Research, Inc.

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