The Contractual Approach to Sovereign Debt Restructuring

47 Pages Posted: 22 Feb 2011

See all articles by Sergi Lanau

Sergi Lanau

International Monetary Fund (IMF)

Date Written: February 21, 2011


The contractual approach proposes the introduction of clauses in sovereign debt contracts to address a number of inefficiencies in sovereign debt markets. Two of its central innovations are collective action clauses and seniority clauses. This paper analyses these two clauses when: (1) repayment is endogenous and depends on creditor lobbying effort; (2) litigation for full repayment does not increase the payment to be extracted from the creditor. There is a positive externality of effort that strongly interacts with asset distribution and contractual clauses. Individual litigation is not desirable from the creditors’ point of view since it weakens the incentives to exert effort. Collective action clauses block litigation and maximise repayment, especially when creditors are heterogeneous in the amount of debt they hold. The adoption of seniority clauses modifies the incentives to exert effort and thus repayment. This effect can be positive or negative. If average portfolio sizes are similar but the marginal loan being repaid is unevenly distributed among creditors, repayment falls. Since effort decisions are influenced by asset distribution, the paper also identifies and analyses a novel role for secondary markets.

Keywords: Sovereign debt, collective action clauses, seniority clauses, secondary markets

JEL Classification: F33, F34

Suggested Citation

Lanau, Sergi, The Contractual Approach to Sovereign Debt Restructuring (February 21, 2011). Bank of England Working Paper No. 409, Available at SSRN: or

Sergi Lanau (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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