IDEAS home Printed from https://ideas.repec.org/p/saq/wpaper/9-16.html
   My bibliography  Save this paper

Debt Overhang and Sovereign Debt Restructuring

Author

Listed:
  • Mattia Osvaldo Picarelli

    () (Department of Social Sciences and Economics, Sapienza University of Rome, Italy.)

Abstract

Debt overhang is defined as a situation where a large amount of debt distorts the optimal investment decisions and discourages the government's efforts of the debtor country to undertake the necessary "adjustment policies". In this paper I study some different strategies that can be used to solve the sovereign debt overhang problem. In particular, I consider two strategies based on a debt restructuring process, via haircut or rescheduling, and a third one based on conditional-additional lending. This strategy relies on the idea that the debtor country can get new lending from the existing creditors, in order to undertake investments that can affect the productivity shock distribution in a positive way (or reduce the probability of default). The aim of this paper is to study the consequences, deriving from the three strategies described, on the incentives to invest in a "troubled country". According to these consequences and under some specific conditions, I rank the three strategies in order to see which is the most effective one. In particular, I find that if the change in investments due to the conditional-additional lending makes the probability of default low in this scenario, the conditional lending strategy will be the most effective one. Basically, this paper might help the policy-makers to implement the right intervention according to the specific scenarios considered.

Suggested Citation

  • Mattia Osvaldo Picarelli, 2016. "Debt Overhang and Sovereign Debt Restructuring," Working Papers 9/16, Sapienza University of Rome, DISS.
  • Handle: RePEc:saq:wpaper:9/16
    as

    Download full text from publisher

    File URL: http://www.diss.uniroma1.it/sites/default/files/allegati/DiSSE_Picarelli_wp9_2016.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
    3. Jeffrey D. Sachs, 1989. "Conditionality, Debt Relief, and the Developing Country Debt Crisis," NBER Chapters,in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 255-296 National Bureau of Economic Research, Inc.
    4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, March.
    5. Carmen M. Reinhart & Vincent R. Reinhart & Kenneth S. Rogoff, 2012. "Public Debt Overhangs: Advanced-Economy Episodes since 1800," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 69-86, Summer.
    6. Jürgen von Hagen & Jean Pisani-Ferry & André Sapir & Francois Gianviti & Anne O. Krueger, . "A European mechanism for sovereign debt crisis resolution: a proposal," Blueprints, Bruegel, number 446.
    7. Fernández, Raquel & Martin, Alberto, 2014. "The Long and the Short of It: Sovereign Debt Crises and Debt Maturity," CEPR Discussion Papers 10322, C.E.P.R. Discussion Papers.
    8. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    9. Serkan Arslanalp & Peter Blair Henry, 2005. "Is Debt Relief Efficient?," Journal of Finance, American Finance Association, vol. 60(2), pages 1017-1051, April.
    10. Rose, Andrew K., 2005. "One reason countries pay their debts: renegotiation and international trade," Journal of Development Economics, Elsevier, vol. 77(1), pages 189-206, June.
    11. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
    12. Jeffrey D. Sachs, 1989. "Conditionality, Debt Relief, and the Developing Country Debt Crisis," NBER Chapters,in: Developing Country Debt and the World Economy, pages 275-284 National Bureau of Economic Research, Inc.
    13. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    14. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
    15. Carmen M. Reinhart & Christoph Trebesch, 2014. "A Distant Mirror of Debt, Default, and Relief," NBER Working Papers 20577, National Bureau of Economic Research, Inc.
    16. Marchesi, Silvia & Thomas, Jonathan P, 1999. "IMF Conditionality as a Screening Device," Economic Journal, Royal Economic Society, vol. 109(454), pages 111-125, March.
    17. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    18. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
    19. Froot, Kenneth A, 1989. "Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 49-70, February.
    20. Prokop, Jacek, 2012. "Bargaining over debt rescheduling," MPRA Paper 44315, University Library of Munich, Germany.
    21. Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief And Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251, February.
    22. Bac, Mehmet, 1999. "Grace Periods in Sovereign Debt," Review of International Economics, Wiley Blackwell, vol. 7(2), pages 322-327, May.
    23. Christoph Trebesch & Michael G. Papaioannou & Udaibir S Das, 2012. "Sovereign Debt Restructurings 1950-2010; Literature Survey, Data, and Stylized Facts," IMF Working Papers 12/203, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Debt Overhang; Debt Restructuring; Nash Bargaining; Haircut; Rescheduling; Conditional Lending.;

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:saq:wpaper:9/16. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Pierluigi Montalbano). General contact details of provider: http://edirc.repec.org/data/dtrosit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.