A Seniority Arrangement for Sovereign Debt
Satyajit Chatterjee, Burcu Eyigungor
American Economic Review · 2015 · Volume 105 · Issue 12
Abstract
A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate this problem is the inclusion of a seniority clause in debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the "absolute priority" or "first-in-time" rule). In this paper, we propose a modification of the absolute priority rule suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default. (JEL E32, E44, F34, G15, H63, O16, O19)
Keywords
Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, International Lending and Debt Problems, International Financial Markets, National Debt, Debt Management, Sovereign Debt, Economic Development: Financial Markets, Saving and Capital Investment, Corporate Finance and Governance, International Linkages to Development, Role of International Organizations
Enable JavaScript for citation tools and additional paper interactions.