## The Perils of Bilateral Sovereign Debt

_IMF Working Papers, November 7, 2025_

## Source details

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## Bibliographic details
- Authors: Francisco Roldan, Cesar Sosa Padilla
- Published: November 7, 2025
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229027878.001

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### Summary and research question
- We study the interaction between private and official sovereign debts.
- We develop a quantitative sovereign default model featuring a senior creditor with whom borrowing terms are negotiated.
- We use this model to evaluate implications of the emergence of new official lenders not bound by the Paris Club framework.

### Model features and mechanism
- Quantitative sovereign default model with a senior creditor negotiating borrowing terms.
- Key modeled mechanism: endogenous cross-elasticity of bilateral terms to market debt, which generates a relational overborrowing effect.

### Main findings
- The dynamics of bilateral bargaining lead the government to issue more market debt.
- Increased market debt raises default risk.
- The increase in default risk creates welfare losses.
- The relational overborrowing effect arises in the model due to an endogenous cross-elasticity of bilateral terms to market debt.
- The cross-elasticity can be assessed in practice to evaluate new forms of bilateral sovereign debt.

### Policy implications and evaluation use
- The model can be used to evaluate implications of the emergence of new official lenders not bound by the Paris Club framework.
- Practical assessment of the endogenous cross-elasticity can inform evaluation of new forms of bilateral sovereign debt and their potential welfare and risk consequences.

### Metadata and classification
- Authors: Francisco Roldan, Cesar Sosa Padilla
- Publication date: November 7, 2025
- Series: Working Paper No. 2025/235
- Issue: 235
- Volume: 2025
- Pages: 30
- DOI: https://doi.org/10.5089/9798229027878.001
- Stock No: WPIEA2025235
- ISBN: 9798229027878
- ISSN: 1018-5941
- Subjects: Debt default; External debt; Financial institutions; Financial markets; Loans; Public and publicly-guaranteed external debt; Public debt; Securities markets
- Keywords: bilateral bargaining; borrowing country; Debt default; debt dilution; debt price; default probability; Global; IMF working papers; large lender; Loans; market debt; official debt; Public and publicly-guaranteed external debt; Securities markets; Sovereign debt

*IMF Working Papers — The Perils of Bilateral Sovereign Debt, Francisco Roldan and Cesar Sosa Padilla, November 7, 2025; Working Paper No. 2025/235; DOI: https://doi.org/10.5089/9798229027878.001*

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_Source: https://www.imf.org/en/publications/wp/issues/2025/11/07/the-perils-of-bilateral-sovereign-debt-571475_