Using Standstills to Manage Sovereign Debt Crises
36 Pages Posted: 12 Jan 2007
Date Written: January 10, 2007
This paper presents a model analyzing the potential for an International Court with powers to declare standstills to mitigate the coordination problem inherent to roll-overs in sovereign debt markets. It is shown that, regardless of the quality of the information handled by such an Institution, the scale of the coordination problem is reduced since its mere existence forces investors to focus on the Court's course of action rather than on other investors' beliefs. Furthermore, the model shows that, in order to avoid moral hazard, the right of recourse to the Court should be made conditional.
Keywords: Sovereign Debt, liquidity runs, standstills, effort
JEL Classification: D82, F02, K41
Suggested Citation: Suggested Citation