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Maturity Structure and Debt Renegotiation in International Lending

Jaromir Nosal

No 1042, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper presents a model of sovereign default with multi-period debt contracts with endogenous maturity. The sovereign in the model chooses the most favorable combination of interest rate, loan size and maturity out of the contracts oered in equilibrium by international lenders. All three characteristics of the contract endogenously vary with the business cycle of the sovereign. Additionally, in contrast to existing theories, we explicitly model the debt overhang problem: that the market power of the lenders depends on the renancing opportunities of the sovereign borrower. As a special case, we model how the debt is optimally restructured in case the sovereign decides to cease payments on outstanding debt. We explore the quantitative predictions of the calibrated model for debt, endogenous business cycle evolution of the debt contracts and the determination of the optimal debt relief when the sovereign is in default.

Date: 2013
New Economics Papers: this item is included in nep-dge and nep-opm
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