Economic Theory

, Volume 64, Issue 4, pp 635–656 | Cite as

Bargained haircuts and debt policy implications

  • Aloisio Araujo
  • Marcia Leon
  • Rafael Santos
Research Article


We extend the Cole and Kehoe model (J Int Econ 41:309–330, 1996) by adding a Rubinstein bargaining game between creditors and debtor country to determine the share of debt repayment in a sovereign debt crisis. Ex-post, the possibility of partial repayment avoids the costly case of total default, as seen recently in Greece. Ex-ante, the effects are to increase the sovereign debt cap and delay the fiscal adjustment. In other words, expectations of a haircut in times of crisis relax leverage restrictions implied by financial markets and make government more lenient, suggesting caution with haircut adoption, especially when risk-free interest rates are low.


Partial default Speculative attacks Debt crisis Leverage 

JEL Classification

F34 G01 H63 


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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.IMPA and EPGE/FGVRio de JaneiroBrazil
  2. 2.Research Department, Banco Central do BrasilRio de JaneiroBrazil
  3. 3.EPGE/FGVRio de JaneiroBrazil

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