Discussion Paper Details

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Title: Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures

Author(s): Sayantan Ghosal and Marcus Miller

Publication Date: February 2003

Keyword(s): creditor coordination, international financial architecture, moral hazard and sovereign debt restructuring

Programme Area(s): International Macroeconomics

Abstract: We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor?s incentives leads to excessive ?rollover failure? by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures, involving ?contractibility? of sovereign debtor?s payoffs, suspension of convertibility in a ?discovery? phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF?s Sovereign Debt Restructuring Mechanism than the Collective Action Clauses which some promote as an alternative.

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Bibliographic Reference

Ghosal, S and Miller, M. 2003. 'Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures'. London, Centre for Economic Policy Research.