Settlement games with rank-order payoffs and applications to sovereign debt restructuring

Consider a sovereign who must obtain agreement with all creditors in order to realize a gain from re-entering world capital markets. A simple game of settlement is developed to reflect strategic interaction between creditors in this environment. Payoffs to creditors depend only on the rank-order in which they settle and the solution concept is Markov-perfect equilibrium. This generates an extremely simple and tractable solution under which delay depends a comparison between the immediate payoff and the average over payoffs going forward. The solution can generate sequences of cascade and delay observed in practice. Comparative dynamics, the effect of increasing the number of creditors and the impact on delay of secondary markets are analyzed. We derive the empirical distribution of delay implied by the model for comparison to the observed distribution of delays in the data. Finally, we derive predictions for the time path of settlements within a given sovereign debt restructuring as a function of the motives for creditors to holdout, and compare these predictions with data on the ongoing negotiations to restructure Argentina’s debts.