sovereign debt restructuring

Over the past few years there has been an active debate among policy-makers on appropriate mechanisms for restructuring sovereign debt, particularly international bonds. In this paper a simple theoretical model is developed to analyse the merits of these proposals. The analysis suggests that collective action clauses (CACs) can resolve the inefficiencies caused by intra-creditor coordination problems, provided that all parties have complete information about each others preferences. In such a world, statutory mechanisms are unnecessary. This is no longer the case, however, when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors. In this case, the inefficiencies induced by strategic behaviour the debtor-creditor bargaining problem cannot be resolved by the parties themselves: removing these inefficiencies would require the intervention of a third party.
 
Argentina defaulted on part of its external debt at the beginning of 2002. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly, producing higher-than-average inflation.

Large-scale debt restructuring was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance its debt. Creditors (many of them private citizens in Spain, Italy, Germany, Japan and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture funds who had acquired sovereign bonds during the critical moments, at very low prices, asked to be repaid immediately.
 
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