We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short
and long-term bonds subject to standard contracting frictions: the country cannot commit to repay its
debts nor to a specific path of future debt issues, and contracts cannot be made state contingent nor
renegotiated. We show that, in order to reduce incentives to engage in debt dilution, the country must
issue short-term debt. This exposes it to roll-over crises and inefficient repayments. ...
We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short
and long-term bonds subject to standard contracting frictions: the country cannot commit to repay its
debts nor to a specific path of future debt issues, and contracts cannot be made state contingent nor
renegotiated. We show that, in order to reduce incentives to engage in debt dilution, the country must
issue short-term debt. This exposes it to roll-over crises and inefficient repayments. We examine the
effects of alternative restructuring regimes, which either write-down debt or extend its maturity in the
event of crises, and show that both necessarily improve ex ante welfare if they they do not decrease
expected payments to creditors during crises. In particular, we show that the way in which these regimes
redistribute payments between short- and long-term creditors, which has been a central point in recent
policy debates, is inconsequential.
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