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Sovereign-debt Renegotiations: A Strategic Analysis

Listed author(s):
  • Raquel Fernandez
  • Robert W. Rosenthal

The process of debt-rescheduling between a creditor and a sovereign (LDC) debtor is modeled as a noncooperative game built on a one-sector growth model. The creditor's threat to impose default penalties is ignored here as inherently incredible; instead, the debtor's motivation for repayment is to reap benefits from attaining an improved credit standing in international capital markets. The creditor can forgive portions of the outstanding debt so that a real-time bargaining process results with concessions being in the form of debt-service payments by the debtor and debt forgiveness by the creditor. Subgame-perfect equilibria of the game are characterized the main finding is that these all result in Pareto optima in which the creditor extracts all the surplus.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2597.

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Date of creation: May 1988
Publication status: published as "Strategic Models of Sovereign-Debt Negotiations," Review of Economic Studies, Vol. 57, pp. 331-349, (1990).
Handle: RePEc:nbr:nberwo:2597
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  1. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  2. Jeffrey Sachs, 1983. "Theoretical Issues in International Borrowing," NBER Working Papers 1189, National Bureau of Economic Research, Inc.
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