Strategic Behavior in Sovereign Debt Restructuring: Impact and Policy Responses

Abstract

The restructuring of sovereign debt is time consuming. For the period since 1970, the time between an initial default on a debt and the final restructuring of that debt has averaged roughly seven years (Pitchford and Wright 2007). These delays show little sign of abating. Argentina’s default of 2000 remains unresolved at the time of writing, and US courts have recently affirmed the use of pari passu clauses to prevent the servicing of new debts while previously issued debt remains in default and hence limits a country’s ability to borrow again.¹ Likewise, although Greece used the domestic legislation to promptly restructure privately held bonds issued under Greek law in 2012, a future restructuring involving offcial creditors and foreign law bondholders appears inevitable.²

This paper was prepared for the Round Table on Debt Crises and their Resolution: Analysis and Policies held on August 13 and 14, 2012 in Buenos Aires, and organized by the International Economic Association, The Argentine Association of Political Economy, and the University of Buenos Aires. We thank the Round Table participants for comments.