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Discussion Paper Details

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Title: Inefficient Private Renegotiation of Sovereign Debt

Author(s): Kenneth Kletzer

Publication Date: December 1989

Keyword(s): Asymmetric Information, Debt Renegotiation and Sovereign Immunity

Programme Area(s): International Trade and Regional Economics

Abstract: The literature on sovereign debt emphasizes that international financial transactions are impeded because the fulfilment of contractual obligations by a government is time-inconsistent. The process of renegotiation between private creditors and debtor governments can create further inefficiencies in the world allocation of capital. In this paper, two potential sources of social cost in the private renegotiation of debt repayments and new loans are discussed. First, legal privileges accorded to existing creditors by their collective governments can render time-consistent the efficient allocation of capital constrained by sovereign immunity when there is ex post bargaining over net transfers. The absence of possibilities for full commitment by creditors implies that the outcomes achievable with ex post bargaining of simple debt contracts differ from those achievable with state-contingent contracts, as conceived in the literature. Second, the use of offers in a renegotiation to elicit private information about debtor characteristics is socially costly.

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Bibliographic Reference

Kletzer, K. 1989. 'Inefficient Private Renegotiation of Sovereign Debt'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=357