Bargained Haircuts and Debt Policy Implications
Marcia Leon and
Rafael Santos ()
No 416, Working Papers Series from Central Bank of Brazil, Research Department
We extend the Cole and Kehoe model by adding a Rubinstein bargaining game between creditors and debtor country to determine the share of debt repayment in a sovereign debt crisis. Ex-post, the possibility of partial repayment avoids the costly case of total default, as seen recently in Greece. Ex-ante, the effects are to increase the sovereign debt cap and delay the fiscal adjustment. In other words, expectations of a haircut in times of crisis relax leverage restrictions implied by financial markets and make government more lenient, suggesting caution with haircut adoption, especially when risk-free interest rates are low
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Journal Article: Bargained haircuts and debt policy implications (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bcb:wpaper:416
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