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Sovereign Debt Default : The Impact of Creditor Composition

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Author Info
Dhillon Amrita, (University of Warwick)
García-Fronti Javier (University of Warwick)
Zhang Lei (University of Warwick)

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Abstract

The main motivation of this paper is to study the impact of the composition of creditors on the probability of default and the risk premium on sovereign bonds, when there is debtor moral hazard. In the absence of any legal enforcement, relational contracts work only when there are creditors who have a repeated relationship with the borrower. We show that ownership structures with a larger fraction of long term lenders are associated with a lower default probability and lower risk premia. Moreover, competitive markets structures lead to loss in efficiency as well when there is moral hazard, in contrast to the case with perfect enforceability and information.

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 901.

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Date of creation: 2009
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Handle: RePEc:wrk:warwec:901

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Related research
Keywords: Sovereign default ; Institutions ; Reputation ; Uncertainty;

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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  1. 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. [Downloadable!]
  2. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June. [Downloadable!] (restricted)
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  3. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February. [Downloadable!] (restricted)
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  4. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115, pages 403-446. [Downloadable!] (restricted)
  5. Thomas F. Hellmann & Kevin C. Murdock & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March. [Downloadable!] (restricted)
  6. Eaton, Jonathan, 1996. "Sovereign Debt, Reputation and Credit Terms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(1), pages 25-35, January. [Downloadable!] (restricted)
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This page was last updated on 2009-11-25.

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