Title: Sovereign debt and the London Club: A precommitment device for limiting punishment for default
Authors: Uppal, R ×
Van Hulle, Cynthia #
Issue Date: May-1997
Publisher: Elsevier science bv
Series Title: Journal of banking & finance vol:21 issue:5 pages:741-756
Abstract: In this paper, we examine the role that institutions may play in enabling banks to write contracts whereby sovereign debt is not forgiven ex post. Our model provides a rationale for the emergence of a centralized forum for debt renegotiation, such as the London Club, as well as for bank syndicates. These bank syndicates arise as part of a pre-commitment device rather than for risk sharing purposes. We propose a debt contract under which only involuntary default is forgiven ex post. Our main findings are that under this contract, debt forgiveness after voluntary (strategic) default is avoided. When voluntary default occurs, access to the credit market is denied only for a limited number of periods, rather than forever. In contrast to a voluntary default, involuntary default is forgiven immediately.
ISSN: 0378-4266
Publication status: published
KU Leuven publication type: IT
Appears in Collections:Research Center Finance, Leuven
× corresponding author
# (joint) last author

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