Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models

Debt Dilution and Sovereign Default Risk

Journal of Political Economy ◽

10.1086/688081 ◽

2016 ◽

Vol 124 (5) ◽

pp. 1383-1422 ◽

Cited By ~ 28

Author(s):

Juan Carlos Hatchondo ◽

Leonardo Martinez ◽

César Sosa-Padilla

Keyword(s):

Default Risk ◽

Sovereign Default ◽

Sovereign Default Risk ◽

Debt Dilution

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Debt Dilution and Sovereign Default Risk

SSRN Electronic Journal ◽

10.2139/ssrn.2189553 ◽

2012 ◽

Cited By ~ 8

Author(s):

Juan Carlos Hatchondo ◽

Leonardo Martinez ◽

Cesar Sosa Padilla

Keyword(s):

Default Risk ◽

Sovereign Default ◽

Sovereign Default Risk ◽

Debt Dilution

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Eurobonds Past and Present: A Comparative Review on Debt Mutualization in Europe

Review of Law & Economics ◽

10.1515/rle-2016-0047 ◽

2016 ◽

Vol 12 (3) ◽

Cited By ~ 4

Author(s):

Rui Pedro Esteves ◽

Ali Coşkun Tunçer

Keyword(s):

Moral Hazard ◽

Financial Control ◽

Current Debate ◽

Historical Evidence ◽

Market Participants ◽

Historical Literature ◽

Key Characteristics ◽

Comparative Review ◽

Short Run ◽

Debt Dilution

AbstractThis paper reviews the economic and historical literature on debt mutualization in Europe with reference to pre-1914 guaranteed bonds and the current Eurobonds debate. We argue that, notwithstanding the differences in scale and nature, debt mutualization solutions similar to Eurobonds were tried before, and the closest historical examples to the present debate are the pre-1914 guaranteed bonds. We highlight three key characteristics of debt mutualization, which are apparent both in the current debate and in history: moral hazard, debt dilution and conditionality. We show that the fears about short-run dilution and moral hazard were not unknown to pre-1914 market participants. These problems were partly addressed by mechanisms of conditionality such as international financial control. The historical evidence suggests that the dilution of outstanding obligations may be overplayed in the current debate. On the contrary, creditors’ moral hazard (ignored in current debt mutualization proposals) was as problematic as the usual debtor’s moral hazard –especially when the groups of countries guaranteeing the bonds and the creditor nations did not overlap entirely.

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A Seniority Arrangement for Sovereign Debt

The American Economic Review ◽

10.1257/aer.20130932 ◽

2015 ◽

Vol 105 (12) ◽

pp. 3740-3765 ◽

Cited By ~ 11

Author(s):

Satyajit Chatterjee ◽

Burcu Eyigungor

Keyword(s):

Sovereign Debt ◽

Realistic Model ◽

Priority Rule ◽

Debt Contracts ◽

Absolute Priority ◽

Course Of Action ◽

The Absolute ◽

Debt Dilution ◽

Normative Implications

A sovereign’s inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate this problem is the inclusion of a seniority clause in debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the “absolute priority” or “first-in-time” rule). In this paper, we propose a modification of the absolute priority rule suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default. (JEL E32, E44, F34, G15, H63, O16, O19)

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