“Beneficial” Delays in Debt Restructuring Negotiations

Author/Editor:

Ran Bi

Publication Date:

February 1, 2008

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2008/038

Subject:

Capital markets Consumption Debt renegotiation Debt settlement Yield curve

Frequency:

Quarterly

English

Publication Date:

February 1, 2008

ISBN/ISSN:

9781451869002/1018-5941

Stock No:

WPIEA2008038

Pages:

29

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