Sovereign-Debt Renegotiations: a Strategic Analysis

22 Pages Posted: 4 Jul 2004 Last revised: 6 Feb 2021

See all articles by Raquel Fernández

Raquel Fernández

New York University - Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Robert W. Rosenthal

Boston University, Department of Economics

Date Written: May 1988

Abstract

The process of debt-rescheduling between a creditor and a sovereign (LDC) debtor is modeled as a noncooperative game built on a one-sector growth model. The creditor's threat to impose default penalties is ignored here as inherently incredible; instead, the debtor's motivation for repayment is to reap benefits from attaining an improved credit standing in international capital markets. The creditor can forgive portions of the outstanding debt so that a real-time bargaining process results with concessions being in the form of debt-service payments by the debtor and debt forgiveness by the creditor. Subgame-perfect equilibria of the game are characterized the main finding is that these all result in Pareto optima in which the creditor extracts all the surplus.

Suggested Citation

Fernández, Raquel and Rosenthal (deceased), Robert W., Sovereign-Debt Renegotiations: a Strategic Analysis (May 1988). NBER Working Paper No. w2597, Available at SSRN: https://ssrn.com/abstract=428345

Raquel Fernández (Contact Author)

New York University - Leonard N. Stern School of Business, Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Robert W. Rosenthal (deceased)

Boston University, Department of Economics

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