Working Paper No. 13-30 Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt
نویسندگان
چکیده
An important inefficiency in sovereign debt markets is debt dilution, wherein sovereigns ignore the adverse impact of new debt on the value of existing debt and, consequently, borrow too much and default too frequently. A widely proposed remedy is the inclusion of seniority clause in sovereign debt contracts: Creditors who lent first have priority in any restructuring proceedings. We incorporate seniority in a quantitatively realistic model of sovereign debt and find that seniority is quite effective in mitigating the dilution problem. We also show theoretically that seniority cannot be fully effective unless the costs of debt restructuring are zero. JEL: E44, F34, G12, G15
منابع مشابه
Debt Dilution and Seniority in a Model of Defaultable Sovereign Debt
An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a country or firm ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the debt dilution problem is seniority of debt, wherein creditors who lent first are given priority i...
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