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Inefficient private renegotiation of sovereign debt

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  • Kletzer, Kenneth M.

Abstract

The negotiation of sovereign debt repayments and of new loans after default may yield inefficient outcomes that justify intervention by creditor country governments and international financial institutions. The author analyzes possible distortions arising in renegotiations between private creditors and sovereign borrowers. He argues that legal privileges accorded to existing creditors in their home jurisdictions can distort the flow of resources for capital formation abroad. Seniority privileges for old lenders convey to them some of the social returns from new lending, reducing the potential rewards for those who might provide the new funds. Hence the author urges investigation of official alienation of these privileges, regulatory reform, and introduction of alternative financial instruments that embody opportunities for creditor commitment.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 441.

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Date of creation: 31 Oct 1990
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Handle: RePEc:wbk:wbrwps:441

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Related research

Keywords: Strategic Debt Management; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Financial Intermediation;

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References

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  1. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  2. Raquel Fernandez & Robert W. Rosenthal, 1988. "Sovereign-debt Renegotiations: A Strategic Analysis," NBER Working Papers 2597, National Bureau of Economic Research, Inc.
  3. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(374), pages 287-307, June.
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 97-109, January.
  5. Jeremy I. Bulow & Kenneth Rogoff, 1987. "A Constant Recontracting Model of Sovereign Debt," NBER Working Papers 2088, National Bureau of Economic Research, Inc.
  6. Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 54(3), pages 345-64, July.
  7. Eaton, Jonathan, 1990. "Debt Relief and the International Enforcement of Loan Contracts," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(1), pages 43-56, Winter.
  8. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  9. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1989. " LDC Debt: Forgiveness, Indexation, and Investment Incentives," Journal of Finance, American Finance Association, American Finance Association, vol. 44(5), pages 1335-50, December.
  10. 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.
  11. Worrall, Tim, 1990. "Debt with potential repudiation," European Economic Review, Elsevier, Elsevier, vol. 34(5), pages 1099-1109, July.
  12. Sobel, Joel & Takahashi, Ichiro, 1983. "A Multistage Model of Bargaining," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(3), pages 411-26, July.
  13. Kletzer, K.M., 1988. "Sovereign Debt Renegotiation Under Asymmetric Information," Papers, Yale - Economic Growth Center 555, Yale - Economic Growth Center.
  14. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(2), pages 231-259, April.
  15. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 53(1), pages 69-76, January.
  16. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, Elsevier, vol. 29(1), pages 1-21, February.
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Cited by:
  1. 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.

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