Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures

Sayantan Ghosal and Marcus Miller

Economic Journal, 2003, vol. 113, issue 487, 276-304

Abstract: We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. In the face of sovereign default, the need to give appropriate incentives to the debtor leads to excessive 'rollover failure' by creditors. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures - involving increased '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 promoted by others. Copyright 2003 Royal Economic Society.

Date: 2003
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