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Selective sovereign defaults

  • Aitor Erce

Breaches in intercreditor equity are common ground during sovereign debt restructurings. In this paper I explore residence-based breaches by studying patterns of discrimination between residents and foreign creditors during debt restructurings. I frame the analysis with a simple model of a government's strategic decision to differentiate between the servicing of its domestic and its external debt. In the model, the basic trade-off facing the authorities is to default on external debt and in so doing restricting private access to international capital markets or to default on domestic debt, thereby curtailing the banking sector's capacity to lend. I test the model's conclusions by analyzing 11 recent sovereign restructurings. After distinguishing neutral cases where the sovereign treated creditors equitably and instances of discrimination against residents and foreigners, I present evidence in support of the model. The origin of liquidity pressures, the robustness and depth of the banking system and the extent of the corporate sector's reliance on foreign capital markets vis-a-vis domestic credit markets have the potential to explain the patterns of discrimination observed in the data.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 127.

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Date of creation: 2012
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Handle: RePEc:fip:feddgw:127
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  1. Brutti, Filippo, 2008. "Legal enforcement, public supply of liquidity and sovereign risk," MPRA Paper 13949, University Library of Munich, Germany.
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2003. "Excessive Dollar Debt: Financial Development and Underinsurance," Journal of Finance, American Finance Association, vol. 58(2), pages 867-894, 04.
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  9. Guido M. Sandleris, 2005. "Sovereign Defaults: Information, Investment and Credit," 2005 Meeting Papers 21, Society for Economic Dynamics.
  10. Cristina Arellano & Narayana R. Kocherlakota, 2008. "Internal Debt Crises and Sovereign Defaults," NBER Working Papers 13794, National Bureau of Economic Research, Inc.
  11. Broner, Fernando A & Martin, Alberto & Ventura, Jaume, 2007. "Enforcement Problems and Secondary Markets," CEPR Discussion Papers 6498, C.E.P.R. Discussion Papers.
  12. Agustin Carstens & Luis I. Jacome H., 2005. "Latin American Central Bank Reform: Progress and Challenges," Macroeconomics 0509022, EconWPA.
  13. Kohlscheen, E, 2009. "Domestic vs. External Sovereign Debt Servicing : An Empirical Analysis," The Warwick Economics Research Paper Series (TWERPS) 904, University of Warwick, Department of Economics.
  14. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
  15. Bengt Holmstrom & Jean Tirole, 2002. "Domestic and International Supply of Liquidity," American Economic Review, American Economic Association, vol. 92(2), pages 42-45, May.
  16. Carlos Arteta & Galina Hale, 2006. "Sovereign debt crises and credit to the private sector," Working Paper Series 2006-21, Federal Reserve Bank of San Francisco.
  17. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies; How Much is theprivate Sector Affected?," IMF Working Papers 09/29, International Monetary Fund.
  18. Ousmène Mandeng, 2004. "Intercreditor Distribution in Sovereign Debt Restructuring," IMF Working Papers 04/183, International Monetary Fund.
  19. Javier Díaz-Cassou & Aitor Erce-Domínguez & Juan J. Vázquez-Zamora, 2008. "The role of the IMF in recent sovereign debt restructurings: Implications for the policy of lending into arrears," Banco de Espa�a Occasional Papers 0805, Banco de Espa�a.
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