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Restructuring the Sovereign Debt Restructuring Mechanism

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  • Mark L. J. Wright
  • Rohan Pitchford

Abstract

Sovereign defaults are time consuming and costly to resolve ex post. But these costs also improve borrowing incentives ex ante. What is the optimal tradeoff between efficient borrowing ex ante and the costs of default ex post? What policy reforms, from collective action clauses to an international bankruptcy court, would attain this optimal tradeoff? Towards an answer to these questions, this paper presents a simple incomplete markets model of sovereign borrowing that is coupled with an explicit and flexible model of the sovereign debt restructuring process. We characterize the optimal amount of delay, and explore numerically the effects of various policy options on the amount of delay in renegotiations, and on the efficiency of capital flows.

Suggested Citation

  • Mark L. J. Wright & Rohan Pitchford, 2008. "Restructuring the Sovereign Debt Restructuring Mechanism," 2008 Meeting Papers 147, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:147
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    Cited by:

    1. Rohan Pitchford & Mark L. J. Wright, 2012. "Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(2), pages 812-837.
    2. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 114, pages 164-179.
    3. David Benjamin & Mark L J Wright, 2019. "Deconstructing delays in sovereign debt restructuring," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 382-404.
    4. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.
    5. David Benjamin & Mark L. J. Wright, 2009. "Recovery before redemption: A theory of delays in sovereign debt renegotiations," CAMA Working Papers 2009-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    6. Ignacio Presno & Demian Pouzo, 2014. "Optimal Taxation with Endogenous Default under Incomplete Markets," 2014 Meeting Papers 689, Society for Economic Dynamics.
    7. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2010. "International Government Debt," Business School Working Papers 2010-03, Universidad Torcuato Di Tella.
    8. Demian Pouzo & Ignacio Presno, 2015. "Optimal Taxation with Endogenous Default under Incomplete Markets," Papers 1508.03924, arXiv.org, revised May 2016.

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