DP3729 | Coordination Failure, Moral Hazard and Sovereign Bankruptcy Procedures

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We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor?s incentives leads to excessive ?rollover failure? by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures, involving ?contractibility? of sovereign debtor?s payoffs, suspension of convertibility in a ?discovery? phase and penalties in case of malfeasance. In relation to the current debate, this is more akin to the IMF?s Sovereign Debt Restructuring Mechanism than the Collective Action Clauses which some promote as an alternative.