Beneficial Delays in Debt Restructuring Negotiations (EPub)
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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Target Statistics and Model Statistics
Determinants of Renegotiation Delay Length
Equilibrium Debt Recovery Rates
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agreement Argentina Argentine debt restructuring autocorrelation average delay length bond spreads borrower borrower's payoff calibration capital markets chooses to pass countercyclical country’s current period data statistic debt holder debt recovery rate debt renegotiation problem debt renegotiation process debt repayment schedules debt restructuring debt-to-mean output ratio default decisions defaulted debt level defaulting country denote discount factor economy endowment shock equilibrium debt recovery equilibrium delay length first-mover advantage GDP data given international investors larger cake lender lender’s payoff length of exclusion Merlo and Wilson Nash Bargaining Nash Bargaining game output process output realizations output shocks player proportional output loss real business cycle reﬂects renegotiation outcome repays the maturing result risk aversion risk free risk-free interest rate selected as proposer settle the debt settle the defaulted simulation smooth consumption sovereign bonds sovereign debt sovereign default sovereign’s probability stay in autarky stochastic bargaining game strategies value function value of passing value of proposing