“Beneficial” Delays in Debt Restructuring Negotiations

Ran Bi

Authorized for distribution by Atish R. Ghosh

February 2008


Delays in debt restructuring negotiations are widely regarded as inefficient. This paper
argues that delays can allow the economy to recover from a crisis, make more resources
available for debt settlement, and enable the negotiating parties to enjoy a larger “cake”.
Within this context, therefore, delays may be “beneficial”. This paper explores this idea by
constructing a dynamic model of sovereign default in which debt renegotiation is modeled as
a stochastic bargaining game based on Merlo and Wilson’s (1995) framework. Quantitative
analysis shows that this model can generate an average delay length comparable to that
experienced by Argentina in its most recent debt restructuring.

“Beneficial” Delays in Debt Restructuring Negotiations

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