Beneficial Delays in Debt Restructuring Negotiations

Author/Editor: Bi, Ran
Publication Date: February 01, 2008
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Delays in debt restructuring negotiations are widely regarded as inefficient. This paper argues that delays can allow the economy to recover from a crisis, make more resources available for debt settlement, and enable the negotiating parties to enjoy a larger "cake". Within this context, therefore, delays may be "beneficial". This paper explores this idea by constructing a dynamic model of sovereign default in which debt renegotiation is modeled as a stochastic bargaining game based on Merlo and Wilson's (1995) framework. Quantitative analysis shows that this model can generate an average delay length comparable to that experienced by Argentina in its most recent debt restructuring.
Series: Working Paper No. 08/38
Subject(s): Debt restructuring | Argentina | Sovereign debt

Author's Keyword(s): debt renegotiation | stochastic bargaining | renegotiation delays
Publication Date: February 01, 2008
Format: Paper
Stock No: WPIEA2008038 Pages: 29
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