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Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut

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  • Kim Oosterlinck
  • Loredana Ureche-Rangau

Abstract

Sovereign debts are often subject to payment suspension. Default, i.e. the financial incapacity to fulfil the debt service, and repudiation, i.e. the denial by a sovereign to recognize its legal obligations, are normally used to explain these payment suspensions. Intuitively, for bondholders, defaults should incur the smallest financial losses. In this case, bondholders may indeed hope for either a negotiated solution (leading only to a partial loss), or for a resumption of the debt service if the defaulting state manages to overcome its financial troubles. In the case of repudiations, these two elements are not relevant as repudiations usually go with a complete stop of the negotiation process. Furthermore, when a country repudiates its debt, its pay-back ability does not matter as the debtor government refuses to fulfil its financial obligations. This paper shows, by using two series of bonds (Romanian bonds in default during the 1930’ and Russian bonds repudiated in 1918), that there are some situations when the market prices of repudiated bonds may stay above those of defaulted bonds. This counter-intuitive observation is explained by market anticipation of possible events having a strong influence on the repudiated bond prices (bail out of the Russian debt by the French Government or by a country created following the decline of the Tsarist Empire).
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Suggested Citation

  • Kim Oosterlinck & Loredana Ureche-Rangau, 2005. "Entre la peste et le choléra: le détenteur d'obligations peut préférer la répudiation au défaut," ULB Institutional Repository 2013/6693, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:ulb:ulbeco:2013/6693
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    1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
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    Cited by:

    1. Bernal, Oscar & Oosterlinck, Kim & Szafarz, Ariane, 2010. "Observing bailout expectations during a total eclipse of the sun," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1193-1205, November.
    2. Kim Oosterlinck & John Landon-lane, 2006. "Hope Springs Eternal – French Bondholders and the Soviet Repudiation (1915–1919)," Review of Finance, European Finance Association, vol. 10(4), pages 507-535, December.
    3. John Landon-Lane & Kim Oosterlinck, 2005. "Hope springs eternal… French bondholders and the Soviet Repudiation (1915-1919)," Departmental Working Papers 200513, Rutgers University, Department of Economics.
    4. Marc D. Weidenmier & Kim Oosterlinck, 2007. "Victory or Repudiation? The Probability of the Southern Confederacy Winning the Civil War," NBER Working Papers 13567, National Bureau of Economic Research, Inc.
    5. Mitchener, Kris James & Oosterlinck, Kim & Weidenmier, Marc D. & Haber, Stephen, 2015. "Victory or repudiation? Predicting winners in civil wars using international financial markets," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 310-319.

    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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