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Sovereign debt crisis: coordination, bargaining and moral hazard

By Sayantan Ghosal and Kannika Thampanishvong

Abstract

We study the interaction between (a) inefficiencies in the post-default debtor-creditor bargaining game and (b) ex ante debtor moral hazard and excessive lending in sovereign debt markets. Conditional on default, selffulfilling debt crisis driven by creditor coordination failure exists and crisis risk is inefficiently high. Strengthening collective action clauses (CACs) has an ambiguous impact on crisis risk. Even with ex ante debtor moral hazard, crisis risk remains inefficiently high. Moreover, even without debtor moral hazard, excessive lending by creditors generates, endogenously, positive default probability. We establish the case for a formal sovereign bankruptcy procedure to complement the role of CACs

Topics: HJ
Publisher: University of Warwick. Centre for the Study of Globalisation and Regionalisation
Year: 2005
OAI identifier: oai:wrap.warwick.ac.uk:1961

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