Journal Article

Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment

Rohan Pitchford and Mark L. J. Wright

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 79, issue 2, pages 812-837
Published in print April 2012 | ISSN: 0034-6527
Published online November 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdr038
Holdouts in Sovereign Debt Restructuring: A Theory of Negotiation in a Weak Contractual Environment

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  • Contract Law
  • International Law
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  • Analysis of Collective Decision-making

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Why is it difficult to restructure sovereign debt in a timely manner? In this paper, we present a theory of the sovereign debt-restructuring process in which delay arises as individual creditors hold up a settlement in order to extract greater payments from the sovereign. We then use the theory to analyse recent policy proposals aimed at ensuring equal repayment of creditor claims. Strikingly, we show that such collective action policies may increase delay by encouraging free riding on negotiation costs, even while preventing hold-up and reducing total negotiation costs. A calibrated version of the model can account for observed delays and finds that free riding is quantitatively relevant: whereas in simple low-cost debt-restructuring operations, collective mechanisms will reduce delay by more than 60%, in high-cost complicated restructurings, the adoption of such mechanisms results in a doubling of delay.

Keywords: Soveign debt; Holdout; Negotiation; Contracts; Default; D23; D78; F34; K12; K33

Journal Article.  13392 words.  Illustrated.

Subjects: Contract Law ; International Law ; Production and Organizations ; International Finance ; Analysis of Collective Decision-making

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