Discussion paper

DP4901 Structuring and Restructuring Sovereign Debt: The Role of Seniority

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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Citation

Bolton, P and O Jeanne (2005), ‘DP4901 Structuring and Restructuring Sovereign Debt: The Role of Seniority‘, CEPR Discussion Paper No. 4901. CEPR Press, Paris & London. https://cepr.org/publications/dp4901