Getting to yes: The role of creditor coordination in debt restructuring negotiations

Abstract

How do indebted governments restructure their debts with private creditors? What explains variation in indebted states’ negotiating behavior? Existing explanations of debt restructuring have largely treated creditors as a profit-maximizing monolith; Yet creditors have different exposures, ties to borrowers, and roles in the international banking system. Inter-creditor disputes are common. In this paper, I argue that because institutional norms dictate burden sharing, the makeup of the creditor group matters for indebted states’ negotiating behavior. The requirement of near-consensus decision-making allows almost any creditor to hold up negotiations. It limits the outcome to what the most reluctant creditors will agree to. Debtor governments are aware of compositional issues and where coordination is most difficult ex-ante, they can use more coercive behaviors to bring reluctant creditors into the fold. I focus on publicly issued declarations of default as one such tool. Using existing data on public moratoriums alongside original data on creditor composition, I find that governments are more likely to publicly announce default as the number of creditors involved in a restructuring increases. The findings imply that who the government is bargaining against matters to how they choose to bargain.