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Willingness to pay and the sovereign debt contract



This paper uses a contract theory model to argue that covenants ruling debt renegotiations are important to assure the sovereign willingness to pay. The model includes the following features: first, collective action clauses, exit consents, aggregation provisions and pari passu clauses play an important role in the post default “game” of negotiations and coalitions. These covenants are represented in reduced form by the endogenous probability of refinancing a defaulted sovereign debt. Second, the model has “endogenous bad luck” because the unfavorable state of nature where default occurs depends on the level of indebtedness, which is itself an endogenous variable. Third, “vultures”, contrary to conventional wisdom, tend to improve the access of emerging economies to capital markets because they might help to rule out strategic defaults. And fourth, under special assumptions the model is able to analyze the possibility of post default discrimination between domestic and foreign bondholders.

Suggested Citation

  • Katherina Fernández & Roque B. Fernández, 2007. "Willingness to pay and the sovereign debt contract," Journal of Applied Economics, Universidad del CEMA, vol. 10, pages 43-76, May.
  • Handle: RePEc:cem:jaecon:v:10:y:2007:n:1:p:43-76

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    References listed on IDEAS

    1. Atkinson, A.B., 2000. "Increased Income Inequality in OECD Countries and the Redistributive Impact of the Government Budget," Research Paper 202, World Institute for Development Economics Research.
    2. Beblo, Miriam & Knaus, Thomas, 2001. "Measuring Income Inequality in Euroland," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 47(3), pages 301-320, September.
    3. Guillermo E. Perry & Omar S. Arias & J. Humberto López & William F. Maloney & Luis Servén, 2006. "Poverty Reduction and Growth : Virtuous and Vicious Circles," World Bank Publications, The World Bank, number 6997.
    4. Bernd Raffelhuschen & Laurence J. Kotlikoff, 1999. "Generational Accounting around the Globe," American Economic Review, American Economic Association, vol. 89(2), pages 161-166, May.
    5. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2009. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Chapters,in: Developments in the Economics of Aging, pages 89-122 National Bureau of Economic Research, Inc.
    6. Ann Harding & Richard Percival & Deborah Schofield & Agnes Walker, 2002. "The Lifetime Distributional Impact of Government Health Outlays," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 35(4), pages 363-379.
    7. Shorrocks, A F, 1982. "Inequality Decomposition by Factor Components," Econometrica, Econometric Society, vol. 50(1), pages 193-211, January.
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    Cited by:

    1. Amrita Dhillon & Javier García-Fronti & Sayantan Ghosal & Marcus Miller, 2006. "Debt Restructuring and Economic Recovery: Analysing the Argentine Swap," The World Economy, Wiley Blackwell, vol. 29(4), pages 377-398, April.
    2. Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.
    3. Bardozzetti, Alfredo & Dottori, Davide, 2014. "Collective action clauses: How do they affect sovereign bond yields?," Journal of International Economics, Elsevier, vol. 92(2), pages 286-303.

    More about this item


    debt; default; negotiation; vultures; Shapley-values;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt


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