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Structuring and Restructuring Sovereign Debt: The Role of Seniority

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  • Bolton, Patrick
  • Jeanne, Olivier

Abstract

In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts.

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  • Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers 4901, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4901
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    Cited by:

    1. Garima Vasishtha, 2010. "Domestic versus External Borrowing and Fiscal Policy in Emerging Markets," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 1058-1074, November.
    2. Eichengreen, Barry & Kletzer, Kenneth & Mody, Ashoka, 2006. "The IMF in a world of private capital markets," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1335-1357, May.
    3. Patrick Bolton & Olivier Jeanne, 2007. "Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime," Journal of Political Economy, University of Chicago Press, vol. 115(6), pages 901-924, December.
    4. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 812-837.
    5. Patrick Bolton & Olivier Jeanne, 2009. "Structuring and Restructuring Sovereign Debt: The Role of Seniority -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(3), pages 879-902.
    6. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
      • Mr. Leonardo Martinez & Juan Carlos Hatchondo & Mr. Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 2012/026, International Monetary Fund.
      • Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2015. "Mortgage Defaults," CAEPR Working Papers 2015-011, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    7. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.
    8. Misa Tanaka, 2006. "Bank Loans Versus Bond Finance: Implications for Sovereign Debtors," Economic Journal, Royal Economic Society, vol. 116(510), pages 149-171, March.
    9. Goderis, Benedikt & Wagner, Wolf, 2009. "Credit Derivatives and Sovereign Debt Crises," MPRA Paper 17314, University Library of Munich, Germany.
    10. Irwin, Gregor & Thwaites, Gregory, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
    11. Chamley, Christophe & Pinto, Brian, 2012. "Sovereign bailouts and senior loans," Policy Research Working Paper Series 6181, The World Bank.
    12. Saravia, Diego, 2010. "On the role and effects of IMF seniority," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1024-1044, October.
    13. Ran Bi, 2008. ""Beneficial" Delays in Debt Restructuring Negotiations," 2008 Meeting Papers 766, Society for Economic Dynamics.
    14. Sherif Khalifa, 2010. "Conditionality covenants: Commitment versus discretion in sovereign credit contracts," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 411-423.
    15. Stephen Quinn, 2008. "Securitization of Sovereign Debt: Corporations as a Sovereign Debt Restructuring Mechanism in Britain, 1694-1750," Working Papers 200701, Texas Christian University, Department of Economics.
    16. Federico Sturzenegger and Jeromin Zettelmeyer, 2006. "Has the Legal Threat to Sovereign Debt Restructuring Become Real?," Business School Working Papers legalthreat, Universidad Torcuato Di Tella.
    17. Christophe Chamley & Brian Pinto, 2012. "Sovereign Bailouts and Senior Loans," NBER Chapters, in: NBER International Seminar on Macroeconomics 2012, pages 269-291, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Sovereign debt; Seniority; Debt dilution; Collective action clause; Sovereign default;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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