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dc.contributor.author Ari, Anil
dc.contributor.author Corsetti, Giancarlo
dc.contributor.author Dedola, Luca
dc.date.accessioned 2018-09-26T07:04:28Z
dc.date.available 2018-09-26T07:04:28Z
dc.date.issued 2018-04
dc.identifier.uri http://hdl.handle.net/10230/35499
dc.description.abstract Is the seniority structure of sovereign debt neutral for a government’s decision between defaulting and raising surpluses? In this paper, we address this question using a model of debt crises where a discretionary government endogenously chooses distortionary taxation and whether to apply an optimal haircut to bondholders. We show that when the size of senior tranches is small, a version of the Modigliani-Miller theorem holds: tranching just redistributes government revenues from junior to senior bondholders, while taxes and government borrowing costs remain unchanged. However, as senior tranches become sufficiently large, default costs on senior debt transpire into a stronger commitment to repay not only the senior tranche, but also the junior one. We show that there is a lower threshold for senior bonds above which tranching can eliminate default on both junior and senior debt, and an upper threshold beyond which the government defaults also on senior debt.
dc.description.sponsorship The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries ADEMU Working Paper Series;112
dc.rights This is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.
dc.rights.uri https://creativecommons.org/licenses/by/4.0/
dc.subject.other Debt crises
dc.subject.other Sovereign default
dc.subject.other Seniority
dc.subject.other Eurobonds
dc.subject.other Multiple equilibria
dc.subject.other Self-fulfilling expectations
dc.title Debt seniority and sovereign debt crises
dc.type info:eu-repo/semantics/workingPaper
dc.relation.projectID info:eu-repo/grantAgreement/EC/H2020/649396
dc.rights.accessRights info:eu-repo/semantics/openAccess

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