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Sovereign Default and State-Contingent Debt


  • Martin Brooke
  • Rhys R. Mendes
  • Alex Pienkowski
  • Eric Santor


The Latin American debt crises in the 1980s and the Asian crisis in the late 1990s both provided impetus for reforming the framework for restructuring sovereign debt. In the late 1980s, the Brady plan established the importance of substantive debt relief in addressing some crises. A decade later, as the Asian crisis faded, the G10 and major emerging market economies worked together to increase the flexibility of IMF lending and promoted the wider use of collective action clauses in foreign law bonds. More recently, the banking crisis of 2008-09 has led to the implementation of an ambitious financial sector reform agenda to reduce the risk of such a crisis occurring again. But reforms to reduce the incidence and cost of sovereign debt crises, such as those experienced in the euro area, have proceeded more slowly. The international community has a role to play in addressing this gap. In that regard, this paper is intended to stimulate debate on the problems in the current practices for sovereign debt restructuring and puts forward some proposals to improve the functioning of sovereign debt markets. The Bank of Canada and the Bank of England have collaborated on these issues in the past. For example, in 2001, Andy Haldane and Mark Kruger authored a joint paper on how to resolve sovereign debt crises in a more orderly and transparent manner. This current work builds on those ideas by exploring how state-contingent debt could further improve the system. Charlie Bean/John Murray London/Ottawa November 2013

Suggested Citation

  • Martin Brooke & Rhys R. Mendes & Alex Pienkowski & Eric Santor, 2013. "Sovereign Default and State-Contingent Debt," Discussion Papers 13-3, Bank of Canada.
  • Handle: RePEc:bca:bocadp:13-3

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    References listed on IDEAS

    1. Andrew G Haldane & Jorg Scheibe, 2004. "IMF lending and creditor moral hazard," Bank of England working papers 216, Bank of England.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. Prasanna Gai & Ashley Taylor, 2004. "International Financial Rescues and Debtor-Country Moral Hazard," International Finance, Wiley Blackwell, vol. 7(3), pages 391-420, December.
    4. Andy Haldane, Bank of England & Mark Kruger, Bank of Canada, 2002. "The Resolution of International Financial Crises: Private Finance and Public Funds," Bank of Canada Review, Bank of Canada, vol. 2001(Winter), pages 3-13.
    5. Becker, Torbjorn & Richards, Anthony & Thaicharoen, Yunyong, 2003. "Bond restructuring and moral hazard: are collective action clauses costly?," Journal of International Economics, Elsevier, vol. 61(1), pages 127-161, October.
    6. Jeromin Zettelmeyer & Christoph Trebesch & Mitu Gulati, 2013. "The Greek debt restructuring: an autopsy," Economic Policy, CEPR;CES;MSH, vol. 28(75), pages 513-563, July.
    7. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    8. Chamon, Marcos & Mauro, Paolo, 2006. "Pricing growth-indexed bonds," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3349-3366, December.
    9. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 91-116.
    10. Robert J. Barro, 1995. "Optimal Debt Management," NBER Working Papers 5327, National Bureau of Economic Research, Inc.
    11. Bergljot Barkbu & Barry Eichengreen & Ashoka Mody, 2011. "International Financial Crises and the Multilateral Response: What the Historical Record Shows," NBER Working Papers 17361, National Bureau of Economic Research, Inc.
    12. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    13. Corsetti, Giancarlo & Guimaraes, Bernardo & Roubini, Nouriel, 2006. "International lending of last resort and moral hazard: A model of IMF's catalytic finance," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 441-471, April.
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    Cited by:

    1. Consiglio, Andrea & Zenios, Stavros A., 2015. "The Case for Contingent Convertible Debt for Sovereignst," Working Papers 15-13, University of Pennsylvania, Wharton School, Weiss Center.
    2. Andritzky, Jochen & Christofzik, Désirée I. & Feld, Lars P. & Scheuering, Uwe, 2016. "A mechanism to regulate sovereign debt restructuring in the euro area," Working Papers 04/2016, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    3. Consiglio, Andrea & Tumminello, Michele & Zenios, Stavros A., 2016. "Pricing Sovereign Contingent Convertible Debt," Working Papers 16-05, University of Pennsylvania, Wharton School, Weiss Center.
    4. Nicolas Carnot & Stéphanie Pamies Sumner, 2017. "GDP-linked Bonds: Some Simulations on EU Countries," European Economy - Discussion Papers 2015 - 073, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. Mark Kruger & Robert Lavigne & Julie McKay, 2016. "The Role of the International Monetary Fund in the Post-Crisis World," Discussion Papers 16-6, Bank of Canada.
    6. Yilmaz Akyüz, 2014. "Internationalization of Finance and Changing Vulnerabilities in Emerging and Developing Economies," UNCTAD Discussion Papers 217, United Nations Conference on Trade and Development.
    7. Achim Wambach & Ines Läufer, 2015. "Europäische Wirtschafts- und Währungsunion: Lernen aus der Krise," Otto-Wolff-Institut Discussion Paper Series 02/2015, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    8. Ad van Riet, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    9. Danny Cassimon & Dennis Essers & Karel Verbeke, 2017. "Sovereign Debt Workouts: Quo Vadis?," BeFinD Policy Briefs 4, University of Namur, Department of Economics.
    10. Barr, David & Bush, Oliver & Pienkowski, Alex, 2014. "GDP-linked bonds and sovereign default," Bank of England working papers 484, Bank of England.

    More about this item


    International financial markets; International topics;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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