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  3. American Economic Review
  4. December 2015
  5. A Seniority Arrangement for Sovereign Debt

A Seniority Arrangement for Sovereign Debt

  • Satyajit Chatterjee
  • Burcu Eyigungor
American Economic Review
vol. 105, no. 12, December 2015
(pp. 3740-65)
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Abstract

A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate this problem is the inclusion of a seniority clause in debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the "absolute priority" or "first-in-time" rule). In this paper, we propose a modification of the absolute priority rule suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default. (JEL E32, E44, F34, G15, H63, O16, O19)

Citation

Chatterjee, Satyajit, and Burcu Eyigungor. 2015. "A Seniority Arrangement for Sovereign Debt." American Economic Review, 105 (12): 3740-65. DOI: 10.1257/aer.20130932

Additional Materials

JEL Classification

  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • F34 International Lending and Debt Problems
  • G15 International Financial Markets
  • H63 National Debt; Debt Management; Sovereign Debt
  • O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
  • O19 International Linkages to Development; Role of International Organizations