Sovereign debt crisis: coordination, bargaining and moral hazard
Ghosal, Sayantan and Thampanishvong, Kannika (2005) Sovereign debt crisis: coordination, bargaining and moral hazard. Working Paper. University of Warwick. Centre for the Study of Globalisation and Regionalisation, Coventry.
WRAP_Ghosal_wp15905.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/csgr/research/wo...
We study the interaction between (a) inefficiencies in the post-default debtor-creditor bargaining game and (b) ex ante debtor moral hazard and excessive lending in sovereign debt markets. Conditional on default, selffulfilling debt crisis driven by creditor coordination failure exists and crisis risk is inefficiently high. Strengthening collective action clauses (CACs) has an ambiguous impact on crisis risk. Even with ex ante debtor moral hazard, crisis risk remains inefficiently high. Moreover, even without debtor moral hazard, excessive lending by creditors generates, endogenously, positive default probability. We establish the case for a formal sovereign bankruptcy procedure to complement the role of CACs.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HJ Public Finance|
|Divisions:||Faculty of Social Sciences > Economics
Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation
|Library of Congress Subject Headings (LCSH):||Debts, Public, Financial crises, Moral hazard, Debt relief|
|Series Name:||Working papers (University of Warwick. Centre for the Study of Globalisation and Regionalisation)|
|Publisher:||University of Warwick. Centre for the Study of Globalisation and Regionalisation|
|Place of Publication:||Coventry|
|Number of Pages:||29|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Description:||Completed December 2004|
|Funder:||Economic and Social Research Council (Great Britain) (ESRC)|
|Grant number:||R000219236 (ESRC)|
|References:|| Becker, T., A. Richards and Y. Thaicharoen (2003). “Bond restructuring and moral hazard: are collective action clauses costly?”, Journal of International Economics, 61, 27-161.  Buchheit, L. (1999). “A lawyer’s perspective on the new international financial architecture”, Journal of International Banking Law, 14(7), 225-9.  Buchheit, L. and G. Gulati (2002). “Sovereign bonds and the collective will”, Working Paper No. 34, Georgetown University Law Center, Washington D.C.  Bulow, J. and K. Rogoff (1989). “A constant recontracting model of sovereign debt”, Journal of Political Economy, 97(1), 155-78.  Carlsson, H. and E. van Damme (1993). “Global Games and Equilibrium Selection”, Econometrica, 61, 989-1018.  Cline, W. (1984). International Debt: Systemic Risk and Policy Responses, MIT Press.  Eichengreen, B. and R. Portes (1995). Crisis? What Crisis? Orderly Workouts for Sovereign Debtors, London: CEPR.  Eichengreen, B. and R. Hausmann (1999). “Exchange Rates and Financial Fragility”, NBER Working Paper 7418.  Eichengreen, B. and A. Mody (2000a). “Would collective action clauses raise borrowing costs?”, NBER Working Paper 7458.  Eichengreen, B. and A. Mody (2000b). “Would collective action clauses raise borrowing costs? An Update and Additional Results”, World Bank Research Paper 2363 (June).  Eichengreen, B., K. Kletzer and A. Mody (2003). “Crisis Resolution: Next Steps”, presented at the Brookings Trade Forum (May).  Fischer, S. (2001). “The International Financial System: Crises and Reform”, Lionel Robbins Lecture, London School of Economics, October 29- 31, Photocopy.  Ghosal, S. and M. Miller (2003). “Co-ordination failure, moral hazard and sovereign bankruptcy procedures”, The Economic Journal, 113, 276-304.  International Monetary Fund (2002). “Collective Action Clauses in Sovereign Bond Contracts — Encouraging Greater Use”, prepared by the Policy Development and Review, International Capital Markets and Legal Departments.  Kletzer, K. and B.Wright (2000). “Sovereign debt as intertemporal barter”, American Economic Review, 90(3), 621-39.  Kletzer, K. (2004). “Sovereign bond restructuring: Collective action clauses and official crisis intervention”, in A. Haldane (ed.), Fixing Financial Crises in the 21 st Century, Routledge, Chapter 13, 230-253.  Krueger, A. (2001). “International financial architecture for 2002: a new approach to sovereign debt restructuring”, mimeo, IMF.  Krueger, A. (2002). “A New Approach to Sovereign Debt Restructuring”, IMF: Washington D.C.  Miller, M. and L. Zhang (2000). “Sovereign liquidity crises: the strategic case for a payments standstill”, Economic Journal, 110(460), 335-62.  Morris, S. and H. Shin (1998). “Unique equilibrium in a model of selffulfilling currency attacks”, American Economic Review, 88(3), 587-597.  Richards, A. and M. Gugiatti (2003). “Do Collective Action Clauses Influence Bond Yields? New Evidence from Emerging Markets”, International Finance, 6(3), 415-447.  Rodrik, D. (1998). “Who needs capital account convertibility”, in P. Kenen et al. (eds.), Should the IMF Pursue capital account convertibility?, Essays in International Finance, 201, Princeton University (May).  Roubini, N. and B. Setser (2003). “Improving the Sovereign Debt Restructuring Process: Problems in Restructuring, Proposed Solutions and a Roadmap for Reform”, Washington DC: Institute for International Economics.  Sachs, J. (1995). “Do we need an international lender of last resort”, mimeo, Princeton University.  Taylor, J. (2002). “Sovereign debt restructuring: a US perspective”, mimeo, Department of the Treasury, Washington D.C. (April).  Tirole, J. (2002). Financial Crises, Liquidity and the International Monetary System, Princeton and Oxford: Princeton University Press.  Tirole, J. (2003). “Inefficient Foreign Borrowing: A Dual- and Common- Agency Perspective”, forthcoming, American Economic Review.|
Actions (login required)