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.

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Abstract

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
Date:	March 2005
Number:	No.159
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Status:	Not Peer Reviewed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)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1961

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