Sovereign Bailouts and Senior Loans [electronic resource] / Christophe Chamley
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TextPublication details: Washington, D.C., The World Bank, 2012Description: 1 online resource (30 p.)Subject(s): Bankruptcy and Resolution of Financial Distress | Catalytic lending | Debt forgiveness | Debt Markets | Economic Theory & Research | External Debt | Finance and Financial Sector Development | Financial Intermediation | Institutional lending | Macroeconomics and Economic Growth | Multiple equilibria | Poverty Reduction | Senior loansAdditional physical formats: Chamley, Christophe: Sovereign Bailouts and Senior Loans.Online resources: Click here to access online Abstract: Institutional lending in crisis is evaluated from a theoretical point of view. First, the share of senior loans in new loans is irrelevant under a given probability distribution of the country's resources. Second, seniority may partially alleviate the inefficiency of debt contracts when the distribution of resources is endogenous to the country's physical investment and effort towards success. Third, with multiple lending rate equilibria, institutional lending may induce a switch to a lower private loan rate if it can be done in a sufficiently large amount. Fourth, conditions are analyzed under which debt forgiveness is efficient under a financial shock.
Institutional lending in crisis is evaluated from a theoretical point of view. First, the share of senior loans in new loans is irrelevant under a given probability distribution of the country's resources. Second, seniority may partially alleviate the inefficiency of debt contracts when the distribution of resources is endogenous to the country's physical investment and effort towards success. Third, with multiple lending rate equilibria, institutional lending may induce a switch to a lower private loan rate if it can be done in a sufficiently large amount. Fourth, conditions are analyzed under which debt forgiveness is efficient under a financial shock.
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