Sovereign Bailouts and Senior Loans
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.
Summary: | 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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