Debt dilution and seniority in a model of defaultable sovereign debt

Satyajit Chatterjee (chatterjee.satyajit@gmail.com) and Burcu Eyigungor

No 13-30, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: An important ineffciency in sovereign debt markets is debt dilution, wherein sovereigns ignore the adverse impact of new debt on the value of existing debt and, consequently, borrow too much and default too frequently. A widely proposed remedy is the inclusion of seniority clause in sovereign debt contracts: Creditors who lent first have priority in any restructuring proceedings. We incorporate seniority in a quantitatively realistic model of sovereign debt and find that seniority is quite effective in mitigating the dilution problem. We also show theoretically that seniority cannot be fully effective unless the costs of debt restructuring are zero.

Keywords: Debt (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-fmk and nep-opm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2013/wp13-30.pdf (application/pdf)

Related works:
Working Paper: Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt (2013)
Working Paper: Debt dilution and seniority in a model of defaultable sovereign debt (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:13-30

Ordering information: This working paper can be ordered from
phil.library.mailbox@phil.frb.org

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul (beth.paul@phil.frb.org).