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Holdouts In Sovereign Debt Restructuring: A Theory Of Negotiation In A Weak Contractual Environment

  • Rohan Pitchford
  • Mark L. J. Wright

Negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement. The country cannot borrow internation- ally until it settles with all creditors. Delay arises in equilibrium as creditors engage in strategic hold-up. The model affirms the conventional wisdom that delay increases with more creditors, and with the advent of "vulture" creditors. Contrary to conventional wisdom, putting collective ac- tion clauses into bond contracts may increase delay via free-riding on negotiation costs, even while preventing strategic holdup and reducing total negotiation costs. Secondary debt markets consoli- date debt with high - and disperse debt with low - creditor bargaining power. Whether secondary markets reduce or increase delay, depends on the interaction between strategic holdup and debt consolidation effects. The analysis contributes to the theory of multi-player dynamic timing games through a general treatment of the comparative dynamics used to answer key applied questions about sovereign debt negotiation.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2008-37.

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Length: 60 pages
Date of creation: Oct 2008
Date of revision:
Handle: RePEc:een:camaaa:2008-37
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