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"Beneficial" Delays in Debt Restructuring Negotiations

Listed author(s):
  • Ran Bi

    (Research Department, International Monetary Fund)

Registered author(s):

    Delays in debt restructuring negotiations are commonly observed and are widely regarded as costly and inefficient. This paper argues, however, that delays can be beneficial in that they allow the economy to recover from a crisis and make more resources available to settle the defaulted debt. As a result, the negotiating parties can be better off by waiting and then dividing a larger "cake." To examine whether this argument can explain the observed length of delays in the recent debt restructurings, this paper constructs a dynamic model of sovereign default in which debt renegotiation is modeled as a stochastic bargaining game based on Merlo and Wilson's (1995) framework. Quantitative analysis shows that this model can generate an average delay length comparable to that experienced by Argentina in its most recent debt restructuring.

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    File URL: https://economicdynamics.org/meetpapers/2008/paper_766.pdf
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    Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 766.

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    Date of creation: 2008
    Handle: RePEc:red:sed008:766
    Contact details of provider: Postal:
    Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

    Web page: http://www.EconomicDynamics.org/society.htm
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    1. Irani Arraiz, 2006. "Default, Settlement, and Repayment History: A Unified Model of Sovereign Debt," 2006 Meeting Papers 217, Society for Economic Dynamics.
    2. Enrique G. Mendoza & Katherine A. Smith, 2002. "Margin Calls, Trading Costs, and Asset Prices in Emerging Markets: The Finanical Mechanics of the 'Sudden Stop' Phenomenon," NBER Working Papers 9286, National Bureau of Economic Research, Inc.
    3. Weinschelbaum, Federico & Wynne, Jose, 2005. "Renegotiation, collective action clauses and sovereign debt markets," Journal of International Economics, Elsevier, vol. 67(1), pages 47-72, September.
    4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    5. Cristina Arellano & Ananth Ramanarayanan, 2006. "Default and the Term Structure in Sovereign Bonds," 2006 Meeting Papers 299, Society for Economic Dynamics.
    6. Roubini, Nouriel & Brad Setser, 2004. "Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 378, November.
    7. Natalia Kovrijnykh & Balázs Szentes, 2007. "Equilibrium Default Cycles," Journal of Political Economy, University of Chicago Press, vol. 115, pages 403-446.
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