A Seniority Arrangement for Sovereign Debt

38 Pages Posted: 19 Aug 2015

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: 2015-01-31

Abstract

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

Chatterjee, Satyajit and Eyigungor, Burcu, A Seniority Arrangement for Sovereign Debt (2015-01-31). FRB of Philadelphia Working Paper No. 15-7. Available at SSRN: https://ssrn.com/abstract=2646111 or http://dx.doi.org/10.2139/ssrn.2646111

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
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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

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