A Seniority Arrangement for Sovereign Debt
38 Pages Posted: 6 Feb 2015
Date Written: January 2015
A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the “absolute priority" or “first-in-time" rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default.
Keywords: Debt Dilution, Seniority, Sovereign Default
JEL Classification: E44, F34, G12, G15
Suggested Citation: Suggested Citation