Co-ordination failure, moral hazard and sovereign bankruptcy procedures

Abstract

We study a model of sovereign debt crisis that combines problems of creditor coordination and debtor moral hazard. Solving the sovereign debtor's incentives leads to excessive 'rollover failure' by creditors when sovereign default occurs. We discuss how the incidence of crises might be reduced by international sovereign bankruptcy procedures and relate this to the current debate on revising international financial architecture. Paper prepared for Bank of England Conference on 'The Role of the Official and Private Sectors in Resolving International Financial Crises', London, and for the Latin American Meeting of the Econometric Society, Sao Paolo, Brazil. (Preliminary draft circulated for comments, please do not cite without reference to the authors).