Sovereign Bond Restructuring: Commitment vs. Flexibility

Sovereigns in distress often engage in debt restructuring, typically negotiating with multiple classes of bondholders at once. We use natural experiments to investigate whether sovereign bondholders benefit from committing not to restructure. We find that committing not to restructure one class of bonds is valuable for not only that class, but, in contrast to received theory, for others too. We develop a model to rationalize these cross-bond spillovers. It points to a system of cross-bond equations that, we show, can be exploited to quantify natural experiments and to estimate unobservable elasticities in terms of a few sufficient statistics.