Analytics of sovereign debt restructuring

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 20 October 2003

Working Paper No. 203
By Andrew G Haldane, Adrian Penalver, Victoria Saporta and Hyun Song Shin

Over the past few years there has been an active debate among policy-makers on appropriate mechanisms for restructuring sovereign debt, particularly international bonds. This paper develops a simple theoretical model to analyse the merits of these proposals. The analysis suggests that collective action clauses (CACs) can resolve the inefficiencies caused by intra-creditor coordination problems, provided that all parties have complete information about each other’s preferences. In such a world, statutory mechanisms are unnecessary. This is no longer the case, however, when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors. In this case, the inefficiencies induced by strategic behaviour – the debtor-creditor bargaining problem – cannot be resolved by the parties themselves: removing these inefficiencies would require the intervention of a third party.

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