Sovereign debt, default and renegotiation

Rohan Pitchford and Mark Wright

No 331, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Can the international financial system be reformed to reduce the costs of sovereign defaults? What would the consequences of such ex post reforms be on the ex ante level of sovereign borrowing? This paper presents a simple model in which sovereign debt restructuring negotiations are plagued by limited commitment issues that lead to a holdout problem. Delay in bargaining produces costs ex post that may improve repayment incentives ex ante. The optimal level of holdout is derived, and the framework is used to evaluate a number of existing policy proposals

Keywords: sovereign debt; default (search for similar items in EconPapers)
JEL-codes: F21 F34 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:331

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