Sovereign-debt Renegotiations: A Strategic Analysis

Raquel Fernandez, Robert W. Rosenthal

NBER Working Paper No. 2597
Issued in June 1988
NBER Program(s):   ITI   IFM

The process of debt-rescheduling between a creditor and a sovereign (LDC) debtor is modeled as a noncooperative game built on a one-sector growth model. The creditor's threat to impose default penalties is ignored here as inherently incredible; instead, the debtor's motivation for repayment is to reap benefits from attaining an improved credit standing in international capital markets. The creditor can forgive portions of the outstanding debt so that a real-time bargaining process results with concessions being in the form of debt-service payments by the debtor and debt forgiveness by the creditor. Subgame-perfect equilibria of the game are characterized the main finding is that these all result in Pareto optima in which the creditor extracts all the surplus.

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Published: "Strategic Models of Sovereign-Debt Negotiations," Review of Economic Studies, Vol. 57, pp. 331-349, (1990).

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