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The Role of Multilateral Institutions in the Market for Sovereign Debt

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  • Bhattacharya, Sudipto
  • Detragiache, Enrica

Abstract

Creditor country governments have an interest in avoiding defaults by sovereign debtors because default sanctions may be costly to their citizens. As a result, a standard bargaining model predicts that debtors do not repay in equilibrium, even if the threat of sanctions is credible on the part of the banks. By contracting with a third party, such as a multilateral institution with some degree of independence, creditor country governments can precommit not to intervene. In equilibrium, when debt renegotiation occurs, the sovereign receives a subsidy from the multilateral agency. The model is used to interpret recent debt reduction operations. Copyright 1994 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Bhattacharya, Sudipto & Detragiache, Enrica, 1994. "The Role of Multilateral Institutions in the Market for Sovereign Debt," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 515-529.
    • Handle: RePEc:bla:scandj:v:96:y:1994:i:4:p:515-29
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    Cited by:

    1. Klimenko, Mikhail M., 2002. "Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations," Journal of International Economics, Elsevier, vol. 58(1), pages 177-209, October.
    2. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077, Elsevier.
    3. V. V. Chari & Patrick J. Kehoe, 2003. "Hot Money," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1262-1292, December.
    4. Miller, Marcus & Ghosal, Sayantan & Dhillon, Amrita & García-Fronti, Javier, 2005. "Bargaining and Sustainability: The Argentine Debt Swap of 2005," CEPR Discussion Papers 5236, C.E.P.R. Discussion Papers.
    5. Stephen Easton & Duane Rockerbie, 1999. "Does IMF conditionality benefit lenders?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(2), pages 347-357, June.

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