Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime∗ Patrick Bolton Columbia University∗∗ Olivier Jeanne IMF§ This version, November 2007 ∗This paper has benefited from the comments of Anil Kashyap (the editor) and three anonymous referees. The views expressed in this paper are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its man- agement. Also affiliated with the National Bureau of Economic Research (Cambridge), the Center∗∗ for Economic Policy Research (London) and the European Corporate Governance Institute (Brussels). Contact address: Columbia Business School, 3022 Broadway, Uris Hall 804, New York, NY 10027; phone: (212) 854 9245; fax:(212) 662 8474 ; email:
[email protected]. § Also affiliated with the Center for Economic Policy Research (London). Contact address: IMF, 700 19th street NW, Washington DC 20431; phone: (202) 623 4272; email:
[email protected]. 1 abstract In an environment characterized by weak contractual enforcement, sov- ereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. We show however, that competition for repayment between lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring. 2 1 Introduction The composition of sovereign debt and how it affects debt restructuring ne- gotiations in the event of financial distress has become a central policy issue in recent years. There are two major reasons why the spotlight has been turned on this question. First, the change in the IMF’s policy orientation towards sovereign debt crises, with a proposed greater weight on ‘private sector involvement’ (Rey Report, G-10, 1996), has brought up the question of how easy it actually is to get ‘the private sector involved’; that is, how easy it is to get private debt-holders to agree to a debt restructuring.