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A seniority arrangement for sovereign debt

Author

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  • Satyajit Chatterjee
  • Burcu Eyigungor

Abstract

A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the ?absolute priority\" or ?first-in-time\" rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default.

Suggested Citation

  • Satyajit Chatterjee & Burcu Eyigungor, 2015. "A seniority arrangement for sovereign debt," Working Papers 15-7, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:15-7
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    References listed on IDEAS

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    More about this item

    Keywords

    Debt dilution; Seniority; Sovereign default;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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