Bank loans versus bond finance: implications for sovereign debtors
This paper develops a model to analyse the optimal choice between bank loans and bond finance for a sovereign debtor. We show that if banks have better information about their borrowers compared to bondholders, only the least risky sovereigns issue bonds. But if borrowers can be 'publicly monitored' by an outside agency that disseminates the information about their creditworthiness, their choice between bank loans and bond finance is determined endogenously by the trade-off between two deadweight costs: the crisis cost of a sovereign default and the cost of debtor moral hazard. In equilibrium, sovereigns use bank loans for financing short-term projects and bond issuance for projects with uncertain timing of cash flows if crisis costs are large. We also demonstrate that state-contingent debt and IMF intervention can improve welfare.
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- Stephen Morris & Hyun Song Shin, 1999. "Coordination Risk and the Price of Debt," Cowles Foundation Discussion Papers 1241R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2002.
- Stephen Morris & Hyun Song Shin, 2001. "Coordination risk and the price of debt," LSE Research Online Documents on Economics 25046, London School of Economics and Political Science, LSE Library.
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