DP4901 Structuring and Restructuring Sovereign Debt: The Role of Seniority

Author(s): Patrick Bolton, Olivier Jeanne
Publication Date: February 2005
Keyword(s): collective action clause, debt dilution, seniority, sovereign debt, sovereign default
JEL(s): F34, G15
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4901

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.