Analytics of Sovereign Debt Restructuring

Abstract

Over the past few years there has been an active debate among policy-makers on appropriate mechanisms for restructuring sovereign debt, particularly international bonds. This paper develops a simple theoretical model to analyse the merits of these proposals. The analysis suggests that collective action clauses (CACs) can resolve the inefficiencies caused by intra-creditor coordination problems, provided that all parties have complete information about each other's preferences. In such a world, statutory mechanisms are unnecessary. This is no longer the case, however, when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors. In this case, the inefficiencies induced by strategic behaviour - the debtor-creditor bargaining problem - cannot be resolved by the parties themselves: removing these inefficiencies would require the intervention of a third party.

Keywords: Sovereign debt, restructuring mechanisms, collective action clauses, international bankruptcy, International Monetary Fund

JEL Classification: F33, F34