Sovereign debt restructurings can result in large deadweight losses to debtors and their creditors. This fact accounts for efforts to promote a better framework for the timely resolution of sovereign debt problems. Attention to date has largely focused on creditor coordination issues; in particular, addressing possible coordination failures that can result in protracted delays. This paper reviews these efforts and the steps taken to reduce the costs associated with coordination problems. The informational and commitment challenges that impede the resolution of debt disputes are also considered. These obstacles to efficient bargaining can lead to lengthy delays and increase deadweight losses. At the same time, asymmetric and incomplete information and the inability of sovereign debtors to commit to a flow of resources to debt service hinder efforts to resolve sovereign debt crises through the greater use of GDP-linked debt and debt buybacks. To assuage these effects, the possible use of debt guarantees to expedite restructurings is discussed. In this regard, the objective of a well-designed guarantee that aligns incentives and helps bridge the informational divide between debtor and creditors is to facilitate debt negotiations that result in a bargaining for resolution.
Sovereign Debt Restructuring: Bargaining for Resolution
CIGI Paper No. 124