A Constant Recontracting Model of Sovereign Debt
Few sovereign debtors have repudiated their obligations entirely. But despite the significant sanctions at the disposal of lenders, many borrowers have been able to consistently negotiate for reduced repayments. This paper presents a model of the on-going bargaining process that determines repayment levels. We derive a bargaining equilibrium in which countries with large debts achieve negotiated partial default. The ability to credibly threaten more draconian penalties in the event of repudiation may be of no benefit to lenders. Furthermore, unanticipated increases in world interest rates may actually help the borrowers by making lenders more inpatient for a negotiated settlement. Finally, Western governments may be induced to make payments to facilitate reschedulings even though efficient agreements will be reached without their intervention.
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|Date of creation:||1986|
|Date of revision:|
|Contact details of provider:|| Postal: UNIVERSITY OF CHICAGO, CENTER FOR STUDY OF THE ECONOMY AND THE STATE, 1101 E. 58TH STREET CHICAGO ILLINOIS 60637.|
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