Sovereign Bond Restructuring: Commitment vs. Flexibility

Abstract

Sovereigns in distress often engage in debt restructuring, typically negotiating with multiple classes of bondholders at once. We investigate whether sovereign bondholders benefit from committing not to restructure their debt. To do so, we use a court ruling that made one class of bonds easier to restructure. We find that, relative to a control group, not only did that class depreciate, so did other classes. We rationalize these findings with a model in which bondholders benefit from disciplining a sovereign with a willingness-to-pay problem.