I develop a model of secondary market pricing of sovereign debt when the creditors can reduce the debt. The sovereign obtains a stochastic revenue flow from the external sector and have a constant debt flow obligation. Default is costly for both the sovereign and the creditors and the possibility to reduce debt creates a surplus. The creditors can capture this surplus only if they can continuously adjust the debt flow.
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- Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth & DEC, 1994. "Is the debt crisis history? Recent private capital inflows to developing countries," Policy Research Working Paper Series 1327, The World Bank.
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