Coordinating Creditors

The market for developing country sovereign debt has become increasingly competitive. Is this necessarily good for welfare? Or, is there scope for beneficial government intervention to reduce competition, and promote coordination, among creditors? This paper reviews recent theoretical work on the market for developing country sovereign debt that shows that competition can reduce welfare. Further, it argues that while private sector creditor organizations have been successful at coordinating existing creditors in history, government intervention to discourage entry by new creditors may be welfare improving today. In the past three decades, the market for developing economy sovereign lending has grown increasingly competitive. Advances in telecommunications and the removal of capital market regulations have reduced the costs of doing business. At the same ∗Department of Economics, Stanford University, Stanford CA 94305-5072 (email: [email protected]). This paper has been prepared for the January 2005 Meetings of the American Economic Association in Philadelphia. I thank Liran Einav, Christine Groeger, Prakash Kannan, Narayana Kocherlakota, Nan Li, Fabrizio Perri and Chris Phelan for comments. A technical appendix detailing some of the arguments from the text is available at http://www.stanford.edu/~mlwright/.