Sovereign debt with heterogeneous creditors

Dellas, Harris; Niepelt, Dirk (2016). Sovereign debt with heterogeneous creditors. Journal of international economics, 99(Supplement 1), S16-S26. Elsevier 10.1016/j.jinteco.2015.12.002

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We develop a sovereign debt model with heterogeneous creditors (private and official) where the probability of default depends on both the level and the composition of debt. Higher exposure to official lenders improves incentives to repay due to more severe sanctions but it is also costly because it lowers the value of the sovereign's default option. The model can account for the co-existence of private and official lending, the time variation in their shares in total debt as well as the low rates charged on both. It also produces intertwined default and debt-composition choices.

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