Debt Restructurings with Multiple Creditors

Working Paper No 329 in Economics

Posted: 24 Aug 1999

See all articles by Enrica Detragiache

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Paolo G. Garella

University of Milan - Dipartimento di Scienze Economiche, Aziendali e Statistiche

Date Written: May 1994

Abstract

We develop a model in which debt forgiveness can be Pareto- efficient because it improves incentives to invest. A debt restructuring plan, however, must be unanimously approved by a multiplicity of creditors who have private information about the liquidation value of the debtor. Using mechanism design, we show that too little debt forgiveness is granted in equilibrium, as expected. More interestingly, we find that exchange offers, similar to those used in US corporate debt workouts in the 1980s, are the optimal restructuring scheme for the debtor, as they allow creditors to contribute to debt forgiveness at different levels. Also, when creditors have correlated values they are more willing to offer debt forgiveness, and the debtor is better off. This is the opposite of the `winner's curse' phenomenon in auction theory.

JEL Classification: D82, G34, G33

Suggested Citation

Detragiache, Enrica and Garella, Paolo G., Debt Restructurings with Multiple Creditors (May 1994). Working Paper No 329 in Economics. Available at SSRN: https://ssrn.com/abstract=5451

Enrica Detragiache (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Paolo G. Garella

University of Milan - Dipartimento di Scienze Economiche, Aziendali e Statistiche ( email )

via Conservatorio 7
Milano, 20122
Italy

Register to save articles to
your library

Register

Paper statistics

Abstract Views
766
PlumX Metrics