The contractual approach to sovereign debt restructuring
The contractual approach proposes the introduction of clauses in sovereign debt contracts to address a number of inefficiencies in sovereign debt markets. Two of its central innovations are collective action clauses and seniority clauses. This paper analyses these two clauses when: (1) repayment is endogenous and depends on creditor lobbying effort; (2) litigation for full repayment does not increase the payment to be extracted from the creditor. There is a positive externality of effort that strongly interacts with asset distribution and contractual clauses. Individual litigation is not desirable from the creditors’ point of view since it weakens the incentives to exert effort. Collective action clauses block litigation and maximise repayment, especially when creditors are heterogeneous in the amount of debt they hold. The adoption of seniority clauses modifies the incentives to exert effort and thus repayment. This effect can be positive or negative. If average portfolio sizes are similar but the marginal loan being repaid is unevenly distributed among creditors, repayment falls. Since effort decisions are influenced by asset distribution, the paper also identifies and analyses a novel role for secondary markets.
|Date of creation:||21 Feb 2011|
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- Fernando A Broner & Alberto Martin & Jaume Ventura, 2006.
"Sovereign Risk and Secondary Markets,"
306, Barcelona Graduate School of Economics.
- Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign risk and secondary markets," Economics Working Papers 998, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2009.
- Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," 2006 Meeting Papers 565, Society for Economic Dynamics.
- Broner, Fernando A & Martin, Alberto & Ventura, Jaume, 2007. "Sovereign Risk and Secondary Markets," CEPR Discussion Papers 6055, C.E.P.R. Discussion Papers.
- Fernando A. Broner & Alberto Martín & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," Working Papers 288, Barcelona Graduate School of Economics.
- Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," NBER Working Papers 12783, National Bureau of Economic Research, Inc.
- TÃ¶rbjÃ¶rn I. Becker & Anthony J. Richards & Yunyong Thaicharoen, 2001.
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01/92, International Monetary Fund.
- 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.
- Richards, Anthony & Gugiatti, Mark, 2003.
"Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets,"
Wiley Blackwell, vol. 6(3), pages 415-47, Winter.
- Mark Gugiatti & Anthony Richards, 2003. "Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets," RBA Research Discussion Papers rdp2003-02, Reserve Bank of Australia.
- Eduardo Borensztein & Olivier Jeanne & Paolo Mauro & Jeromin Zettelmeyer & Marcos Chamon, 2005. "Sovereign Debt Structure for Crisis Prevention," IMF Occasional Papers 237, International Monetary Fund.
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