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A proposal for an auction-based sovereign debt restructuring mechanism

A proposal for an auction-based sovereign debt restructuring mechanism

The COVID-induced surge in public debt has raised concerns about its sustainability, further increasing the need to improve the debt-restructuring process. This column proposes an auction-based strategy to restructure sovereign debt that tailors the shape of the restructured debt stock optimally to creditor preferences, subject to debt being sustainable post-restructuring. Any debt relief provided to the country gets optimally distributed over its creditors, thus minimising the pain inflicted upon them. A version of the winner’s curse can reduce the ‘holdout problem’ of creditors trying to free-ride on each other’s contributions towards debt relief. All this should smoothen the restructuring process and enable the debtor to mobilise greater creditor support (given the amount of relief provided).