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Cover -- Contents -- 1 Introduction -- 2 A bare-bones model of sovereign debt crises -- 2.1 Optimal default and taxation plans under discretion -- 2.2 Debt pricing -- 2.3 Rational expectations equilibrium and regularity conditions -- 2.4 Equilibria -- 3 The effect of tranching when senior debt is riskless -- 3.1 A Modigliani-Miller irrelevance result -- 3.2 Non-neutrality -- 4 Risky senior debt -- 5 A numerical illustration -- 6 Conclusion -- 7 Appendix -- A Proofs of Propositions -- A.1 Proof of Proposition 1 -- A.2 Proof of Proposition 2 -- A.3 Proof of Proposition 3 -- A.4 Proof of Proposition 4 -- B Equilibria under tranching

Is the seniority structure of sovereign debt neutral for a government's decision between defaulting and raising surpluses? In this paper, we address this question using a model of debt crises where a discretionary government endogenously chooses distortionary taxation and whether to apply an optimal haircut to bondholders. We show that when the size of senior tranches is small, a version of the Modigliani-Miller theorem holds: tranching just redistributes government revenues from junior to senior bondholders, while taxes and government borrowing costs remain unchanged. However, as senior tranches become sufficiently large, default costs on senior debt transpire into a stronger commitment to repay not only the senior tranche, but also the junior one. We show that there is a lower threshold for senior bonds above which tranching can eliminate default on both junior and senior debt, and an upper threshold beyond which the government defaults also on senior debt. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital control

This article examines the domestic politics of sovereign debt crises. I focus on two alternative mechanisms that aggregate the preferences of domestic actors over debt repayment: single‐party versus multiparty coalition governments. I uncover a very strong empirical regularity using cross‐national data from 48 developing countries between 1971 and 1997. Countries that are governed by a coalition of parties are less likely to reschedule their debts than those under single‐party governments. The effect of multiparty coalitions on sovereign defaults is quantitatively large and roughly of the same order of magnitude as liquidity factors such as debt burden and debt service. These results are robust to numerous specifications and samples.

Cover -- Contents -- 1 Introduction -- 2 A model of systemic sovereign debt crises -- 2.1 Model structure -- 2.2 Financing needs are met and production continues -- 2.3 Financing needs are not met and capital is liquidated -- 2.4 Welfare definitions and equilibrium interest rate -- 3 Laissez-faire equilibrium -- 3.1 Complete financial markets -- 3.2 Incomplete financial markets -- 4 Crisis-resolution frameworks for IFIs -- 4.1 Planner's solution without official transfers -- 4.2 Planner's solution with official transfers, but no commitment -- 4.3 Planner's solution with official transfers and commitment -- 4.4 Welfare implications of alternative crisis-resolution frameworks -- 5 Conclusion -- Appendices -- A: Derivation of the laissez-faire equilibrium -- A.1 Complete financial markets -- A.2 Incomplete financial markets -- B: Derivation of the planner's solution -- B.1 Without commitment -- B.2 With commitment -- C: Constant interest rate.

There is an obvious need to learn more about why some countries succeed and others fail when dealing with debt crises. Why do some sovereign debtors overcome economic problems very quickly and at minor human rights costs for their people, while others remain trapped by debts for years struggling with overwhelming debt burdens and exacerbating economic problems and human suffering? This book analyzes fourteen unique or singular country cases of sovereign debt problems that differ characteristically from the 'ordinary' debtor countries, and have not yet received enough or proper attention - some regarded as successful, some as unsuccessful in dealing with debt crises. The aim is to contribute to a better understanding of the policy options available to countries struggling with debt problems, or how to resolve a debt overhang while protecting human rights, the Rule of Law and the debtor's economic recovery.