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Debtor Discrimination During Sovereign Debt Restructurings

  • Aitor Erce Domiguez

    (Bank of Spain)

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    This paper explores patterns of discrimination between residents and foreign creditors during recent sovereign debt restructurings. We analyze 10 recent episodes distinguishing between neutral cases in which the sovereign treated creditors equitably irrespective of their nationality and instances of discrimination against residents and non-residents. We then present evidence in support of the hypothesis that these patterns of discrimination can be explained by the origin of liquidity pressures, the ex ante soundness of the banking system and the extent of the domestic corporate sector's reliance on international financial markets. On the theoretical side, we present a simple model of a government's strategic decision to differentiate between the servicing of its domestic and its external debt. In our 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 to domestic firms.

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    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1324.

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    Date of creation: 2010
    Date of revision:
    Handle: RePEc:red:sed010:1324
    Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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    1. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," 2006 Meeting Papers 565, Society for Economic Dynamics.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "The Forgotten History of Domestic Debt," NBER Working Papers 13946, National Bureau of Economic Research, Inc.
    3. Filippo Brutti, 2010. "Legal enforcement, public supply of liquidity and sovereign risk," IEW - Working Papers 464, Institute for Empirical Research in Economics - University of Zurich.
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    5. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies: How Much is theprivate Sector Affected?," IMF Working Papers 09/29, International Monetary Fund.
    6. Cristina Arellano & Narayana Kocherlakota, 2008. "Internal Debt Crises and Sovereign Defaults," Levine's Bibliography 122247000000001880, UCLA Department of Economics.
    7. Ricardo Caballero & Arvind Krishnamurthy, 2000. "International and Domestic Collateral Constraints in a Model of Emerging Market Crises," NBER Working Papers 7971, National Bureau of Economic Research, Inc.
    8. Dalia Marin & Haizhou Huang & Chenggang Xu, 2004. "Financial Crisis, Economic Recovery and Banking Development in Russia, Ukraine, and Other FSU Countries," IMF Working Papers 04/105, International Monetary Fund.
    9. Emanuel Kohlscheen, 2010. "Domestic vs external sovereign debt servicing: an empirical analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 93-103.
    10. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
    11. Guido M. Sandleris, 2005. "Sovereign Defaults: Information, Investment and Credit," 2005 Meeting Papers 21, Society for Economic Dynamics.
    12. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2009. "Institutions, Public Debt and Foreign Finance," Carlo Alberto Notebooks 124, Collegio Carlo Alberto.
    13. Broner, Fernando A & Martin, Alberto & Ventura, Jaume, 2007. "Enforcement Problems and Secondary Markets," CEPR Discussion Papers 6498, C.E.P.R. Discussion Papers.
    14. Arteta, Carlos & Hale, Galina, 2008. "Sovereign debt crises and credit to the private sector," Journal of International Economics, Elsevier, vol. 74(1), pages 53-69, January.
    15. 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.
    16. 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.
    17. Bengt Holmstrom & Jean Tirole, 2002. "Domestic and International Supply of Liquidity," American Economic Review, American Economic Association, vol. 92(2), pages 42-45, May.
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