Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures

Sayantan Ghosal and Marcus Miller ()

No 3729, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor’s incentives leads to excessive ‘rollover failure’ by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures, involving ‘contractibility’ of sovereign debtor’s payoffs, suspension of convertibility in a ‘discovery’ phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF’s Sovereign Debt Restructuring Mechanism than the Collective Action Clauses which some promote as an alternative.

Keywords: creditor coordination; international financial architecture; moral hazard; sovereign debt restructuring (search for similar items in EconPapers)
JEL-codes: F02 F30 F33 F34 (search for similar items in EconPapers)
Date: 2003-02
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