Beneficial Delays in Debt Restructuring Negotiations
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.
What people are saying - Write a review
We haven't found any reviews in the usual places.
Other editions - View all
agreement Argentina autocorrelation coefﬁcient average delay length beneﬁcial bond spreads borrower bt+1 business cycle calibration capital markets chooses to pass countercyclical country’s current period data statistic debt arrears debt holder debt recovery rate debt renegotiation process debt restructuring debt settlement debt-to-mean output ratio default frequency defaulted debt level defaulting country deﬁned denote discount factor economy endowment innovations endowment realization endowment shock equilibrium debt recovery equilibrium delay length ﬁnd ﬁrst ﬁxed given government’s inefﬁciencies international investors lender lender’s payoff length of exclusion Lengths under Different Markov chain Merlo and Wilson Nash Bargaining game output process output stream payoff functions players post-default proportional output loss Propose/Pass Choices r)bt Renegotiation Delay Length result risk free risk-free interest rate selected as proposer settle the debt settle the defaulted simulation smooth consumption sovereign bonds sovereign debt sovereign default stay in autarky stochastic bargaining game sufﬁciently VacptL value function VpropB VrejtL