Analytics of Sovereign Debt Restructuring

Bank of England Working Paper No. 203

26 Pages Posted: 30 Sep 2004

See all articles by Andrew Haldane

Andrew Haldane

Bank of England

Adrian Penalver

Bank of England

Victoria Saporta

Bank of England

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: October 2003

Abstract

Over the past few years there has been an active debate among policy-makers on appropriate mechanisms for restructuring sovereign debt, particularly international bonds. This paper develops a simple theoretical model to analyse the merits of these proposals. The analysis suggests that collective action clauses (CACs) can resolve the inefficiencies caused by intra-creditor coordination problems, provided that all parties have complete information about each other's preferences. In such a world, statutory mechanisms are unnecessary. This is no longer the case, however, when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors. In this case, the inefficiencies induced by strategic behaviour - the debtor-creditor bargaining problem - cannot be resolved by the parties themselves: removing these inefficiencies would require the intervention of a third party.

Keywords: Sovereign debt, restructuring mechanisms, collective action clauses, international bankruptcy, International Monetary Fund

JEL Classification: F33, F34

Suggested Citation

Haldane, Andrew and Penalver, Adrian and Saporta, Victoria and Shin, Hyun Song, Analytics of Sovereign Debt Restructuring (October 2003). Bank of England Working Paper No. 203, Available at SSRN: https://ssrn.com/abstract=597403 or http://dx.doi.org/10.2139/ssrn.597403

Andrew Haldane

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Adrian Penalver

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Victoria Saporta (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm