Abstract
This paper develops pricing formulae for sovereign debt by incorporating strategic debt relief games into a model of debt pricing under continuous time uncertainty. Two types of debt relief for sovereign borrowers are considered: debt reductions and exit deals. The formulae provide a good fit to the data and generate plausible predictions in a simulation analysis. The paper also examines how the availability of credible commitment mechanisms affects the amount of debt reduction. Compared with the time-consistent equilibrium, creditors would want to commit to a larger, later debt reduction while the debtor would rather have an earlier, smaller debt reduction.
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