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Structuring and Restructuring Sovereign Debt: The Role of Seniority

  • Bolton, Patrick
  • Jeanne, Olivier

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4901.

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Date of creation: Feb 2005
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Handle: RePEc:cpr:ceprdp:4901
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