Structuring And Restructuring Sovereign Debt: The Role Of A Bankruptcy Regime

In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. The authors show however, that competition for repayment among lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring. The composition of sovereign debt and how it affects debt restructuring negotiations in the event of financial distress has become a central policy issue in recent years.