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Sovereign Debt Default: The Impact of Creditor Composition

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  • Dhillon, Amrita
  • Garcia-Fronti, Javier
  • Zhang, Lei

Abstract

The main motivation of this paper is to study the impact of the composition of creditors on the probability of default and the risk premium on sovereign bonds, when there is debtor moral hazard. In the absence of any legal enforcement, relational contracts work only when there are creditors who have a repeated relationship with the borrower. We show that ownership structures with a larger fraction of long term lenders are associated with a lower default probability and lower risk premia. Moreover, competitive markets structures lead to loss in efficiency as well when there is moral hazard, in contrast to the case with perfect enforceability and information.

Suggested Citation

  • Dhillon, Amrita & Garcia-Fronti, Javier & Zhang, Lei, 2009. "Sovereign Debt Default: The Impact of Creditor Composition," Economic Research Papers 271299, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:271299
    DOI: 10.22004/ag.econ.271299
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    References listed on IDEAS

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    Cited by:

    1. Florian Berg & Paula Margaretic & Sébastien Pouget, 2016. "Sovereign Bond Spreads and Extra-Financial Performance: An Empirical Analysis of Emerging Markets," Working Papers Central Bank of Chile 789, Central Bank of Chile.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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