A seniority arrangement for sovereign debt

Satyajit Chatterjee () and Burcu Eyigungor

No 15-7, Working Papers from Federal Reserve Bank of Philadelphia

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.

Keywords: Debt dilution; Seniority; Sovereign default (search for similar items in EconPapers)
JEL-codes: E44 F34 G12 G15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2015-01-31
New Economics Papers: this item is included in nep-mac and nep-opm
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Citations: View citations in EconPapers (28)

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Journal Article: A Seniority Arrangement for Sovereign Debt (2015)
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