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.