Comment: Empty Creditors and Debt Exchanges
12 Pages Posted: 17 Oct 2009 Last revised: 7 Nov 2011
Date Written: October 16, 2009
This Comment reviews recent proposals to address the “empty creditor” problem. The author argues that previous proposals would do little to reduce the risk that empty creditors will block debt-for-equity exchanges in order to collect credit default swap payments. The author presents an alternative approach that would contain the dangers of empty crediting by modifying the standardized language of swap agreements. Specifically, the author argues for widening the definition of “credit events” to encompass voluntary debt-for-equity exchanges that surpass a certain participation threshold. This reform would benefit the vast majority of credit protection buyers and sellers, while simultaneously reducing deadweight losses due to unnecessary bankruptcy filings.
Keywords: credit default swaps, empty creditors
JEL Classification: G33, G34, G38
Suggested Citation: Suggested Citation