On the Term Structure of Sovereign-Debt Contracts

Mehmet Bac

Review of International Economics, 1995, vol. 3, issue 2, 174-85

Abstract: This paper studies the term structure of a repudiation-proof debt contract encompassing many sequentially scheduled short-term loans in a principal-agent (lender-sovereign borrower) framework. The extension of each loan is conditional on the full repayment of the previous loans in due maturity. Both direct sanctions and loss of access to the international credit market are present as debt-repudiation costs. It is shown that the proposed repudiation-proof composite contract exhibiting decreasing loan sizes and increasing maturities is better for coping with the enforcement problems that characterize sovereign lending. Copyright 1995 by Blackwell Publishing Ltd.

Date: 1995
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