A COOPERATIVE PERSPECTIVE ON SOVEREIGN DEBT: PAST AND PRESENT

Yang der‐yuan

Contemporary Economic Policy, 1999, vol. 17, issue 1, 44-53

Abstract: In the modern era, sovereign states often borrow to finance their budgets; in the medieval period, kings had similar financing needs. Both types of sovereign borrowers share one characteristic: if they failed to fulfill their obligation, legal action is not one of the lenders' options. However, as history has shown, some institutions evolved to secure lenders' rights. We provide a cooperative perspective of the negotiation between debtors and creditors in a two‐period model, using the Nash bargaining solution. Our results show that the initial debt and new loans are positively related, while the remaining debt and the interest rate are negatively related. These conclusions match the financial evolution of England after the Glorious Revolution. This paper may have some implications for the solution of the current Asian financial crisis. (JEL C71, G14, H63, H87, N10)

Date: 1999
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