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Sovereign Default and State-Contingent Debt

Author

Listed:
  • Martin Brooke
  • Rhys R. Mendes
  • Alex Pienkowski
  • Eric Santor

Abstract

The Latin American debt crises in the 1980s and the Asian crisis in the late 1990s both provided impetus for reforming the framework for restructuring sovereign debt. In the late 1980s, the Brady plan established the importance of substantive debt relief in addressing some crises. A decade later, as the Asian crisis faded, the G10 and major emerging market economies worked together to increase the flexibility of IMF lending and promoted the wider use of collective action clauses in foreign law bonds. More recently, the banking crisis of 2008-09 has led to the implementation of an ambitious financial sector reform agenda to reduce the risk of such a crisis occurring again. But reforms to reduce the incidence and cost of sovereign debt crises, such as those experienced in the euro area, have proceeded more slowly. The international community has a role to play in addressing this gap. In that regard, this paper is intended to stimulate debate on the problems in the current practices for sovereign debt restructuring and puts forward some proposals to improve the functioning of sovereign debt markets. The Bank of Canada and the Bank of England have collaborated on these issues in the past. For example, in 2001, Andy Haldane and Mark Kruger authored a joint paper on how to resolve sovereign debt crises in a more orderly and transparent manner. This current work builds on those ideas by exploring how state-contingent debt could further improve the system. Charlie Bean/John Murray London/Ottawa November 2013

Suggested Citation

  • Martin Brooke & Rhys R. Mendes & Alex Pienkowski & Eric Santor, 2013. "Sovereign Default and State-Contingent Debt," Discussion Papers 13-3, Bank of Canada.
  • Handle: RePEc:bca:bocadp:13-3
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    References listed on IDEAS

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    Cited by:

    1. Consiglio, Andrea & Zenios, Stavros A., 2018. "Pricing and hedging GDP-linked bonds in incomplete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 88(C), pages 137-155.
    2. Jochen Andritzky & Désirée I. Christofzik & Lars P. Feld & Uwe Scheuering, 2019. "A mechanism to regulate sovereign debt restructuring in the euro area," International Finance, Wiley Blackwell, vol. 22(1), pages 20-34, May.
    3. Consiglio Andrea & Zenios Stavros A., 2018. "Contingent Convertible Bonds for Sovereign Debt Risk Management," Journal of Globalization and Development, De Gruyter, vol. 9(1), pages 1-24, June.
    4. Yilmaz Akyüz, 2014. "Internationalization of Finance and Changing Vulnerabilities in Emerging and Developing Economies," UNCTAD Discussion Papers 217, United Nations Conference on Trade and Development.
    5. Sperduto Luke, 2019. "Can Human Development Bonds Reduce the Agency Costs of the Resource Curse?," The Law and Development Review, De Gruyter, vol. 12(1), pages 191-245, January.
    6. Consiglio, Andrea & Zenios, Stavros A., 2015. "The Case for Contingent Convertible Debt for Sovereignst," Working Papers 15-13, University of Pennsylvania, Wharton School, Weiss Center.
    7. Sayantan Ghosal & Marcus Miller & Kannika Thampanishvong, 2019. "Waiting for a haircut? A bargaining perspective on sovereign debt restructuring," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 405-420.
    8. Diana Bonfim & David Pereira, 2018. "GDP-linked bonds: design, effects, and way forward," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    9. Andrea Consiglio & Michele Tumminello & Stavros A. Zenios, 2018. "Pricing Sovereign Contingent Convertible Debt," Journal of Enterprising Culture (JEC), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-36, December.
    10. Marco Meyer, 2021. "Dealing fairly with trade imbalances in monetary unions," Politics, Philosophy & Economics, , vol. 20(1), pages 45-66, February.
    11. Christophe Destais, 2017. "Are State-Contingent Sovereign Bonds the Solution to Avoid Government Debt Crisis?," CEPII Policy Brief 2017-19, CEPII research center.
    12. Danny Cassimon & Dennis Essers & Karel Verbeke, 2018. "Sovereign Debt Workouts: Quo Vadis?," Africagrowth Agenda, Africagrowth Institute, vol. 15(3), pages 4-8.
    13. Achim Wambach & Ines Läufer, 2015. "Europäische Wirtschafts- und Währungsunion: Lernen aus der Krise," Otto-Wolff-Institut Discussion Paper Series 02/2015, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.
    14. Nicolas Carnot & Stéphanie Pamies Sumner, 2017. "GDP-linked Bonds: Some Simulations on EU Countries," European Economy - Discussion Papers 073, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    15. Mark Kruger & Robert Lavigne & Julie McKay, 2016. "The Role of the International Monetary Fund in the Post-Crisis World," Discussion Papers 16-6, Bank of Canada.
    16. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    17. Juan Carlos Hatchondo & Mr. Leonardo Martinez & Cesar Sosa Padilla, 2020. "Sovereign Debt Standstills," IMF Working Papers 2020/290, International Monetary Fund.
    18. Leonardo Martinez & Juan Hatchondo, 2017. "Sovereign Cocos and the Reprofiling of Debt Payments," 2017 Meeting Papers 1435, Society for Economic Dynamics.

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    Keywords

    International financial markets; International topics;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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