A Seniority Arrangement for Sovereign Debt

Satyajit Chatterjee () and Burcu Eyigungor

American Economic Review, 2015, vol. 105, issue 12, 3740-65

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 this problem is the inclusion of a seniority clause in 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 suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default. (JEL E32, E44, F34, G15, H63, O16, O19)

JEL-codes: E32 E44 F34 G15 H63 O16 O19 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20130932
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Citations: View citations in EconPapers (35)

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