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Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures

Listed author(s):
  • Sayantan Ghosal
  • Marcus Miller

We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. In the face of sovereign default, the need to give appropriate incentives to the debtor leads to excessive 'rollover failure' by creditors. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures - involving increased 'contractibility' of sovereign debtor's payoffs, suspension of convertibility in a 'discovery' phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF's Sovereign Debt Restructuring Mechanism than the Collective Action Clauses promoted by others. Copyright 2003 Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 113 (2003)
Issue (Month): 487 (04)
Pages: 276-304

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Handle: RePEc:ecj:econjl:v:113:y:2003:i:487:p:276-304
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  1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
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  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. Kenneth Rogoff, 1999. "International Institutions for Reducing Global Financial Instability," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 21-42, Fall.
  10. Bulow, Jeremy & Rogoff, Kenneth, 1990. "Cleaning Up Third World Debt without Getting Taken to the Cleaners," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 31-42, Winter.
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  12. Kevin C. Murdock & Thomas F. Hellmann & 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.
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