SEMINAR: Seniority Reversals and Endogenous Sudden Stops: Some Transfer Problem Dynamics Seminar
Event details
Speaker: Albrecht Ritschl (LSE)
Abstract: Sovereign debt restructuring often ends in abject failure, as analogies from corporate debt restructuring are applied without proper analysis of dynamic disincentives (Bulow and Rogo§, 1989). In this paper we analyze the dynamic incentive effects of debt restructuring and changes in seniority among rivalling debt elements in a stochastic endowment economy with a risk averse sovereign debtor. Away from the default zone, the debtor will prefer to hold senior debt to signal creditworthiness and to obtain a so-called good housekeeping seal of approval. After a major adverse shock and within the default zone, fresh money will only be granted if the debtor is allowed to issue senior debt, making legacy debt junior. This leads to a borrowing binge and is often followed by sudden stop and default episodes in which the junior debt is defaulted on first. We calibrate the model to interwar Germany under the Dawes Plan of 1924-29, where new debt was issued in large amounts. Our simulation results bear out the predictions of Keynes (1922, 1929) about the dim prospects of recovering reparations.
Host: Andrea Papadia (York)