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Title: Structuring and Restructuring Sovereign Debt: The Role of Seniority

Author(s): Patrick Bolton and Olivier Jeanne

Publication Date: February 2005

Keyword(s): collective action clause, debt dilution, seniority, sovereign debt and sovereign default

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Bolton, P and Jeanne, O. 2005. 'Structuring and Restructuring Sovereign Debt: The Role of Seniority'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4901