Structuring and Restructuring Sovereign Debt: The Role of Seniority

Bolton, Patrick; Jeanne, Olivier

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Structuring and Restructuring Sovereign Debt: The Role of Seniority

63 Pages Posted: 2 Jun 2005

See all articles by Patrick Bolton

Patrick Bolton

Imperial College London; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Olivier Jeanne

International Monetary Fund (IMF) - Research Department; Ecole Nationale des Ponts et Chaussees (ENPC); Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: February 2005

Abstract

In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure. We show within a simple model how competition for repayment between lenders may result in sovereign debt that is excessively difficult to restructure in equilibrium. Alleviating this inefficiency requires a sovereign debt restructuring mechanism that fulfills some of the functions of corporate bankruptcy regimes, in particular the enforcement of seniority and subordination clauses in debt contracts.

Keywords: Sovereign debt, seniority, debt dilution, collective action clause, sovereign default

JEL Classification: F34, G15

Suggested Citation: Suggested Citation

Bolton, Patrick and Jeanne, Olivier, Structuring and Restructuring Sovereign Debt: The Role of Seniority (February 2005). Available at SSRN: https://ssrn.com/abstract=734363