Holdouts in sovereign debt restructuring: A theory of negotiation in a weak contractual environment

Vol: 
37/2008
Author name: 
Pitchford R
Wright MLJ
Year: 
2008
Month: 
December
Abstract: 

Negotiations between a country in default and its international creditors are modeled as a dynamic game in an environment of weak contractual enforcement. The country cannot borrow internationally until it settles with all creditors. Delay arises in equilibrium as creditors engage in strategic hold-up. The model affirms the conventional wisdom that delay increases with more creditors, and with the advent of “vulture” creditors. Contrary to conventional wisdom, putting collective action clauses into bond contracts may increase delay via free-riding on negotiation costs, even while preventing strategic holdup and reducing total negotiation costs. Secondary debt markets consolidate debt with high - and disperse debt with low - creditor bargaining power. Whether secondary markets reduce or increase delay, depends on the interaction between strategic holdup and debt consolidation effects. The analysis contributes to the theory of multi-player dynamic timing games through a general treatment of the comparative dynamics used to answer key applied questions about sovereign debt negotiation.

Publication file: 

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