Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment

59 Pages Posted: 23 Apr 2009

See all articles by Rohan Pitchford

Rohan Pitchford

University of Sydney Business School

Mark L. J. Wright

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: October 8, 2008

Abstract

Negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement. The country cannot borrow internationally until it settles with all creditors. Delay arises in equilibrium as creditors engage in strategic hold-up. The model confirms the conventional wisdom that delay increases with more creditors, and with the advent of "vulture" creditors. Contrary to conventional wisdom, putting collective action clauses into bond contracts may increase delay via free-riding on negotiation costs, even while preventing strategic holdup and reducing total negotiation costs. Secondary debt markets consolidate debt with high -- and disperse debt with low -- creditor bargaining power. Whether secondary markets reduce or increase delay depends on the interaction between strategic holdup and debt consolidation effects. The analysis contributes to the theory of multi-player dynamic timing games through a general treatment of the comparative dynamics used to answer key applied questions about sovereign debt negotiation.

Keywords: Sovereign debt, sovereign default, bargaining, delays in bargaining, holdout, free riding, vulture creditors, secondary markets

JEL Classification: D23, D78, F34, K12, K33

Suggested Citation

Pitchford, Rohan and Wright, Mark L.J., Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment (October 8, 2008). Available at SSRN: https://ssrn.com/abstract=1392547 or http://dx.doi.org/10.2139/ssrn.1392547

Rohan Pitchford

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Mark L.J. Wright (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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