Asymmetric Information and Sovereign Debt Disclosure

Abstract

This paper studies sovereign debt and default dynamics under alternative disclosure arrangements in a sovereign default model incorporated with asymmetric information and long-term debt. Government is assumed to have access to both international bond financing and non-Paris club lending (a hidden and collateralized debt). Our results show that with a shift from partial disclosure to full disclosure regime governments can borrow at more favorable terms conditional on the same levels of debt and income. However, due to lack of commitment, favorable bond prices encourage governments to borrow more and experience higher default rates in the long-run equilibrium of the full disclosure regime. As a result, the switch from partial disclosure to full disclosure generates small welfare losses contrary to conventional wisdom.

Keywords: Hidden debt, Sovereign debt, Sovereign default, Collateralized debt, Asym-metric information, Debt disclosure

JEL Classification: E31, F34, F45.