Co-ordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures
Sayantan Ghosal and Marcus Miller
CSGR Working Paper No. 112/03
March 2003
Abstract:
We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor’s incentives leads to excessive ‘rollover failure’ by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures, involving ‘contractibility’ of sovereign debtor’s payoffs, suspension of convertibility in a ‘discovery’ phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF’s Sovereign Debt Restructuring Mechanism than the Collective Action Clauses promoted by others.
Keywords: International Financial architecture, Sovereign debt restructuring, Creditor co-ordination, Moral Hazard.
Address for correspondence:
Centre for the Study of Globalisation and Regionalisation
University of Warwick
Coventry CV4 7AL
Tel: 44 24 7657 4421
Fax: 44 24 7657 2548
E-mail: m.miller@warwick.ac.uk
