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The seniority structure of Sovereign Debt

We study the implicit seniority structure of sovereign debt, using new data on missed payments (arrears) towards six types of external creditors. The data reveal a clear pecking order of sovereign debt repayment and default. As expected, at the top are multilateral social creditors such as the IMF and the World Bank, who are least likely to be defaulted upon. Surprisingly, bilateral social creditors are junior to sovereign bondholders, especially in the period after 1990. Most junior are commercial banks and trade creditors. This pecking order is confirmed after controlling for a country's debt structure, economic fundamentals, and time and country effects. The seniority structure also holds when studying the outcome of sovereign debt restructurings, by comparing creditor losses (haircuts) on private and social external debt: On average, private creditors face significantly lower haircuts than social creditors. Our results pose a challenge for the theoretical literature on sovereign debt.