“Beneficial” Delays in Debt Restructuring Negotiations

Ran Bi

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Global Financial Crisis and Policies Corporate Insolvency and Governance Fiscal Policies and Political Economy

Abstract

Delays in debt restructuring negotiations are widely regarded as inefficient. This paper argues that delays can allow the economy to recover from a crisis, make more resources available for debt settlement, and enable the negotiating parties to enjoy a larger "cake". Within this context, therefore, delays may be "beneficial". This paper explores this idea by constructing a dynamic model of sovereign default in which debt renegotiation is modeled as a stochastic bargaining game based on Merlo and Wilson's (1995) framework. Quantitative analysis shows that this model can generate an average delay length comparable to that experienced by Argentina in its most recent debt restructuring.

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References

1982Perfect Equilibrium in a Bargaining Model 1981Debt with Potential Repudiation: Theoretical and Empirical Analysis 2005Business cycles in emerging economies: the role of interest rates 2007Default Risk and Income Fluctuations in Emerging Economies 1986A Constant Recontracting Model of Sovereign Debt 1991Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models 2005Defaultable debt, interest rates and the current account 2003Debt Intolerance

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2016SYSTEMIC AND IDIOSYNCRATIC SOVEREIGN DEBT CRISES 2016Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors 2014The stock of external sovereign debt: Can we take the data at ‘face value’?2016Quantitative Models of Sovereign Debt Crises 2011The Problem that Wasn’t: Coordination Failures in Sovereign Debt Restructurings 2018The Legacy and the Tyranny of Time: Exit and Re‐Entry of Sovereigns to International Capital Markets

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