The Role of Multilateral Institutions in the Market for Sovereign Debt
Creditor country governments have an interest in avoiding defaults by sovereign debtors because default sanctions may be costly to their citizens. As a result, a standard bargaining model predicts that debtors do not repay in equilibrium, even if the threat of sanctions is credible on the part of the banks. By contracting with a third party, such as a multilateral institution with some degree of independence, creditor country governments can precommit not to intervene. In equilibrium, when debt renegotiation occurs, the sovereign receives a subsidy from the multilateral agency. The model is used to interpret recent debt reduction operations. Copyright 1994 by The editors of the Scandinavian Journal of Economics.
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Volume (Year): 96 (1994)
Issue (Month): 4 ()
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