The Perils of Bilateral Sovereign Debt

Francisco Roldán and Cesar Sosa-Padilla

No 35590, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Motivated by the emergence of new official creditors outside the Paris Club framework, we study the interaction between senior official lending and market debt. We develop a quantitative sovereign default model featuring a large senior lender with whom borrowing terms are negotiated. Obtaining more net financing from the market strengthens the government’s bargaining position and improves bilateral terms. This endogenous cross-elasticity erodes the discipline of spreads and amplifies debt dilution, leading to welfare losses even as bilateral borrowing helps avert some defaults ex-post. With pre-specified rules, rewarding market issuance can be enough to generate such losses, and an optimal rule instead raises bilateral rates with net market financing. The direction of the cross-elasticity can thus guide in practice the assessment of new forms of bilateral sovereign debt.

JEL-codes: F34 F41 G15 (search for similar items in EconPapers)
Date: 2026-08
Note: IFM
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Working Paper: The Perils of Bilateral Sovereign Debt (2025)
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