Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt

39 Pages Posted: 12 Jun 2012

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Burcu Eyigungor

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2012

Abstract

An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority in any bankruptcy or restructuring proceedings. The goal of this paper is to incorporate seniority in a quantitatively realistic, infinite horizon model of sovereign debt and default and examine, both theoretically and quantitatively, the extent to which seniority can mitigate the debt dilution problem.

Keywords: Debt Dilution, Seniority, Sovereign Default

Suggested Citation

Chatterjee, Satyajit and Eyigungor, Burcu, Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt (June 1, 2012). FRB of Philadelphia Working Paper No. 12-14. Available at SSRN: https://ssrn.com/abstract=2083101 or http://dx.doi.org/10.2139/ssrn.2083101

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)

HOME PAGE: http://sites.google.com/site/chatterjeesatyajit/home

Burcu Eyigungor

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
38
Abstract Views
346
PlumX Metrics