Location of Repository

Trade credit, international reserves and sovereign debt

By Emanuel Kohlscheen and Stephen A. O'Connell


We present a unified model of sovereign debt, trade credit and international reserves. Our model shows that access to short-term trade credit and gross international reserves critically affect the outcome of sovereign debt renegotiations. Whereas competitive banks do optimally lend for the accumulation of borrowed reserves that strengthen the bargaining position of borrowers, they also have incentives to restrict the supply of short-term trade credit during renegotiations. We first show that they effectively do so and then derive propositions that : I) establish the size of sovereign debt haircuts as a function of economic fundamentals and preferences ; II) predict that defaults occur during recessions rather than booms, contrary to reputation based models ; III) provide a rationale for holding costly borrowed reserves and, IV) show that the stock of borrowed international reserves tends to increase when global interest rates are low

Topics: HJ
Publisher: University of Warwick, Department of Economics
Year: 2007
OAI identifier: oai:wrap.warwick.ac.uk:1381

Suggested articles



  1. (1989). A constant recontracting model of sovereign debt. doi
  2. (1990). Bargaining and markets. doi
  3. (1990). Cash/debt buy-backs and the insurance value of reserves. doi
  4. (1981). Debt with potential repudiation: theoretical and empirical analysis. doi
  5. (1996). Fiscal adjustment and official reserves in sovereign debt negotiations. doi
  6. (2005). Haircuts: estimating investor losses in sovereign debt restructurings, doi
  7. (1986). Inflation, employment, and welfare in the presence of transactions costs. doi
  8. (1999). International institutions for reducing global financial instability. doi
  9. (1980). Nash bargaining theory I-III,
  10. (1986). Non-cooperative bargaining theory: An introduction. doi
  11. (1992). Noncooperative 37models of bargaining. doi
  12. (2005). One reason countries pay their debts: renegotiation and international trade. doi
  13. (2004). Optimal fiscal and monetary policy under sticky prices. doi
  14. (1982). Perfect equilibrium in a bargaining model. doi
  15. (2002). Reputations and sovereign debt. doi
  16. (1999). Sanctions: some simple analytics. doi
  17. (1989). Sovereign debt: is to forgive to forget ? doi
  18. (1990). The House of Morgan: an American banking dynasty and the Rise of Modern Finance. doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.