Pre-Emptive Sovereign Debt Restructuring and Holdout Litigation

24 Pages Posted: 20 Aug 2018 Last revised: 18 Nov 2021

See all articles by Kartik Anand

Kartik Anand

Deutsche Bundesbank

Prasanna Gai

University of Auckland Business School; Australian National University (ANU); Bank of England

Date Written: 2018


We offer an analytical framework for studying "pre-emptive" debt exchanges. Countries can tailor a sovereign bankruptcy framework by choosing provisions (or "haircuts") ex ante, but must contend with the market discipline of holdout litigation ex post. Secondary markets play a role in shaping the holdout costs facing the sovereign, and our results suggest that it is optimal to prioritise the rights of holdout creditors during litigation so that they are always paid in full. We clarify how macroeconomic and legal factors influence the choice of haircut. Our model contributes to the debate on sovereign debt restructuring by formalizing Bolton and Skeel's (2004) notion of a "Designer SDRM".

Keywords: sovereign debt restructuring, holdout creditors, bankruptcy procedures, absolute priority

JEL Classification: F34, F55, G33, K4

Suggested Citation

Anand, Kartik and Gai, Prasanna, Pre-Emptive Sovereign Debt Restructuring and Holdout Litigation (2018). Deutsche Bundesbank Discussion Paper No. 21/2018, Available at SSRN: or

Kartik Anand (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431


Prasanna Gai

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom
+020 7601 3583 (Phone)

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