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In a liability problem, the asset value of aninsolvent firm must be distributed among the creditors and the firm itself, when the firm has some freedom in negotiating with the creditors. We model the negotiations using cooperative game theory and analyze the Shapley value to resolve such liability problems. We establish three main monotonicity properties of the Shapley value. First, creditors can only benefit from the increase in their claims or of the asset value. Second, the firm can only benefit from the increase of a claim but can end up with more or with less if the asset value increases, depending on the configuration of small and large liabilities. Third, creditors with larger claims benefit more from the increase of the asset value.Even though liability games are constant-sum games and we show that the Shapley value can be calculated directly from a liability problem, we prove that calculating the Shapley payoff to the firm is NP-hard.

This paper shows that debt undermines relational incentives and harms worker morale. We build a dynamic model of a manager who uses limited financial resources to simultaneously repay a creditor and motivate a worker. If the manager can divert or misuse revenue, then debt makes the manager less willing to follow through on promised rewards, leading to low worker effort. In profit-maximizing equilibria, the firm prioritizes repaying its debts, leading to gradual increases in effort and wages. These dynamics can persist even after debts have been fully repaid. Consistent with this analysis, we document that a firm’s financial leverage is negatively related to measures of employee morale, wages, and productivity. This paper was accepted by Joshua Gans, business strategy.

How does the health of creditors affect the pass-through of monetary policy to households? In a financial crisis, asset losses among creditors can either dampen or amplify the effects of monetary policy on lending, depending on how these losses and policies interact with financial frictions. Frictions such as leverage constraints my hinder creditor responses, however easing may instead alleviate frictions that would otherwise constrain lending. Using data on the universe of US credit unions, I document that asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high frequency identification of monetary policy shocks. I find that a one standard deviation asset loss increases the response of credit union lending to a 10 basis point fall in the two-year Treasury rate from a 0.86 to 1.15 percentage point increase. The estimates imply that constraints on monetary policy become more costly in a financial crisis characterized by creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.

Fiscal policy and net capital inflows in developing countries are procyclical. A large amount of literature has examined this phenomenon and explored its consequences for aggregate fluctuations. Multilateral development banks (MDBs) are an important source of external finance for governments and play a key role in financing the execution of fiscal policy. Hence, understanding the behavior of MDB flows is key to gauge their contribution to macroeconomic volatility. This paper investigates the co-movement of sovereign lending from MDBs and private creditors with government expenditure, and finds that multilateral sovereign lending follows government expenditure, and that this correlation does not change if the government is running a surplus or a deficit. This finding raises doubts on the feasibility of MDBs to be counter-cyclical, unless the governments themselves implement counter-cyclical fiscal policies.

The changes in the amount of the external debt of Belarus depending on various factors are analyzed. The study found that the consequences of the epidemic COVID-19 had a significant impact on the increase in the amount of external debt. In addition, political protests against the government have a special weight in the reasons for the growth of Belarus external debt, since their consequences significantly reduced the level of confidence on the part of foreign investors, which led to a fall in the ruble. The role of foreign countries as the main creditors in the external debt of Belarus, as well as in the economy of Belarus as a whole is examined, and the importance of the Belarusian friendship with Russia is considered. In conclusion, an assessment of the structure of the Belarusian economy and methods of its regulation is carried out, and then possible ways of settling the Belarusian debt are presented.

The rich scholarship on the politics and finance of sovereign debt tends to take for granted debt’s most basic form: as a private contract. Nevertheless, legal challenges have been central to the contemporary evolution of sovereign debt dynamics thanks to litigating strategies rendered possible by — mostly standard — contractual stipulations in international sovereign bonds. By using a debt-as-private-contract lens, the paper highlights how exposed sovereign debtors present themselves to these global transactions, how foreign sovereign bond contracts anchor otherwise footloose finance in particular jurisdictions, and how contractual changes sparked by outlier cases of protracted litigation or recent turbulence in debt exchanges have been key to global efforts to reform debt governance around market-based parameters. The legal battle between Argentina and its holdout creditors in US courts is analyzed here to illustrate these dynamics given its significance in sparking contractual revisions. Ultimately, it is clear that credit and contract are inextricably linked. Contractual evolution is revealing of the legal risks taken on by sovereign debtors and their creditors in private markets. The cost of debt hence may go beyond relatively predictable financial calculations.

This article assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behaviour of non-banks and non-borrowing bank creditors. With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be re-established.

In this study, we examined the impact of changes in creditors’ rights on the financial policy of Indian firms in a quasi-natural experimental set up. Using the implementation of Insolvency and Bank...

China has been increasingly involved in debt restructurings for low- and middle-income countries. This paper presents case studies of China's debt relief actions overseas: Iraq (2003), Cuba (2010), Seychelles (2011), Chad (2017), Zambia (2018), Mozambique (2018), Cameroon (2019), Republic of Congo (2019) and Venezuela (in progress). These cases shed light on the commonalities and particularities of China's actions, and underline the evolution of its restructuring terms. We highlight the lack of formal coordination between China and other creditors. China almost exclusively made its own decision on providing restructurings and restructuring terms. The magnitude of China's debt relief actions remains generally limited and varies across countries, depending on whether other creditors have also provided debt restructurings. China seems to have a growing preference for cancellation of accumulated arrears to nominal debt principal reduction. The debt rescheduling cases have significantly increased in recent years as well. This evolution brings China closer to the flow treatment that the Paris Club privileged in its early years of operations and the prevailing practices among private creditors.

This paper analyzes the behaviour of the external adjustment path for the four main economies in the euro area. I find a structural break in the behaviour of the net external position at the time of the introduction of the euro for France, Italy and Spain, pointing out that the inception of the common currency changed their external adjustment process. Germany does not show this structural break, being its external position more affected by other events such as the country reunification in 1989. I also find that France and Italy will adjust the net external position mainly through the valuation component, while Germany and Spain will restore their external balance mostly through the trade component. The common currency area could have exacerbated Germany’s net creditor position as the evolution of the euro has reacted to the external adjustment needs of debtor countries such as Italy and Spain.

The multinational syndicated loan market has crossed the $7 trillion threshold. Prior literature argues that weak borrower country's creditor rights is the main limiting factor to cross‐border lending. We find that lender country's creditor rights can partly substitute for weak borrower creditor rights if a lender is from a better creditor rights country. Our results are robust to controlling for a borrower's country laws, its foreign assets, the loan guarantees provided by its foreign parent, and its choice set of lenders.

Tryphonin, Papinian and the regard for immaterial losses in the law of obligations. Contrary to the first impression given by the sources, there is no dispute among late classical lawyers as to whether a creditor can obtain compensation for an immaterial loss. Rather, the only disputed issue is whether a creditor can demand compensation for performance of monetary value even if it had benefitted a third party. Papinian and Paul affirm this with reference to the precept of bona fides. Tryphonin focuses on the creditor’s freedom of disposal: If the creditor can claim his interest in a hypothetical sale of the object of performance, he must also be entitled to do so if he wants to pass it on free of charge and thus prove his generosity.

There were two dramatic changes in United States (U.S.) government policy toward the monetary role of gold in the last 100 years. The first was in 1933-34. Private holdings of gold were nationalized in March 1933. Then, the U.S. Treasury adopted a new parity for the U.S. dollar of $35.00 an ounce at the end of January 1934. Gold production surged, the private demand for gold fell sharply and the U.S. experienced large increases in the foreign demand for U.S. dollar securities. There was a massive flow of gold to the U.S. The second change in U.S. gold policy followed a meeting at Camp David in August 1971 when the U.S. Treasury closed its gold window because of the perception that there might be a run on its gold holdings as they declined toward $10 billion. Some U.S. officials sought to diminish the monetary role of gold, which was accomplished by, in effect, setting the U.S. monetary price at zero. The anticipation of some U.S. officials at the Camp David meeting was that the persistent U.S. payments problem would disappear once foreign currencies no longer had parities in terms of the U.S. dollar. The prices of these foreign currencies would increase and the U.S. trade surplus would become larger. Instead, many foreign central banks became even larger buyers of U.S. dollar securities, which led to a higher price of the U.S. dollar and a U.S. trade deficit. The U.S. international investment position morphed from the world’s largest creditor country to the world’s largest debtor.

We study the effects of country-level creditor protections on the firm-level choice of debt structure concentration. Using data from forty-six countries, we show that firms form more concentrated debt structures in countries with stronger creditor protection. We propose a trade-off framework of optimal debt structure and show that in strong creditor rights regimes, the benefit of forming concentrated structures outweighs its cost. Because strong creditor protections increase liquidation bias, firms choose concentrated debt structures to improve the probability of successful distressed debt renegotiations. Firms with ex ante higher bankruptcy costs, including those with higher intangibility, cash flow volatility, R&D expenses, and leverage, exhibit stronger effects. Firms with restricted access to capital are also affected more. A difference-in-differences analysis of firms’ debt structure responses to creditor rights reforms confirms the cross-country results. Our findings are robust to alternative settings and a battery of robustness checks.

Scholars continue to debate why states repay their debts to foreign creditors. The existing literature stresses the short-term economic and political costs that deter default, focusing on reputational damage, creditor reprisals, spillover costs, and loss of office. International Relations scholars and economists have largely tested these explanations using quantitative methods, framing their analyses as a choice between default and non-default driven by the rational interests of states or actors within them. The three books considered here draw on qualitative methods to refine and sometimes challenge the prevailing wisdom, offering valuable insights concerning the many types and wider-ranging causes of sovereign default. These books reveal that default is not a binary outcome but instead a spectrum ranging from unilateral repudiation through to cooperative restructuring. Furthermore, governments sometimes default for economically irrational reasons, reflecting shifts in domestic-political interests or changes in state identity. This new literature also raises important questions for future researchers, especially about when default can be beneficial and how it can affect long-term relations between states.

We follow the Nash program to provide a new strategic justification for the TAL-family of rules for bankruptcy problems. The design of our game is inspired by an axiomatization of the TAL-family of rules exploiting the properties of consistency together with certain degrees of lower and upper bounds to all creditors. Bilateral negotiations of our game follow the spirit of those bounds. By means of consistency, we then extend the bilateral negotiations to an arbitrary number of creditors.

We propose a supplementary way to assess the information content of a financial statement disclosure based on the comovement of asset returns in different markets in response to information that has price implications for both. The influence of a signal that strongly influences at least two asset markets measures a dimension of information content less clearly reflected in single‐market responses. We apply our method to debt covenant violation (DCV) disclosures. These are the outcome of a debt renegotiation when the covenant promises in a debt agreement to manage the agency costs of debt are broken. We find that stock and bond return comovement is highest one day before DCV disclosure and differs depending on whether the debt covenant is waived or not waived. We find that stock and bond return comovement in the days following a DCV disclosure decreases more for non‐waiver disclosures than for waiver disclosures. This supports the theory that a non‐waiver outcome shifts control rights and bargaining power to the creditors. Consistent with this theory, single‐market tests show that bonds with a non‐waiver disclosure versus a waiver disclosure earn positive excess returns following a DCV disclosure whereas the reverse is true for stocks.

Multiple borrowing—when borrower obtains overlapping loans from multiple lenders—is a common phenomenon in many credit markets. We build a tractable, dynamic model of multiple borrowing and show that, because overlapping creditors can impose default externalities on each other, expanding financial access by introducing more lenders can backfire. Capital allocation is distorted away from the most productive uses. Entrepreneurs choose inefficient endeavors with low returns to scale. These problems are exacerbated when investments become more pledgeable or when borrowers have access to more lenders, explaining why increased access to finance does not always improve outcomes.

In this article we propose a methodology for the calculation of an international reserves variation threshold that defines the lending decisions of international creditors to developing countries. If the change in net international reserves of the borrowing variation is above that of the threshold, the creditors are willing to lend more. Otherwise, if that change is below the threshold, there will be capital flight. Such a threshold depends on the stocks of debt and international reserves, as well as on the perception of the default risk of the country to honour its debts. Using that threshold, we perform a counterfactual exercise to calculate the time series of international reserve levels that minimize the total cost of reserves holding, namely, the cost of possible illiquidity of the country plus the opportunity cost of holding international reserves. We illustrate the methodology by applying it to five Latin American countries: Argentina, Brazil, Chile, Mexico and Peru.

Recent jurisdictional decisions suggest that sovereign debt will be subject to bilateral investment treaties (BITs) for the foreseeable future. This Article argues that applying BITs to sovereign bonds threatens to undermine the core economic function of those treaties by encouraging inefficient state and creditor behavior and raising the overall cost of sovereign debt. It further argues that this concern can be addressed through an interpretative approach that leads to the equal treatment of like creditors.

Infrequent but turbulent sovereign defaults on domestic creditors were a “forgotten history” in macroeconomics. We propose a Bewley model in which the government chooses debt and default on domestic and foreign creditors by balancing distributional incentives versus the benefits of debt for self-insurance, liquidity, and risk-sharing. A feedback mechanism links debt issuance, the debt distribution, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare and preceded by surging debt and spreads. Debt sells at the risk-free price most often but lack of commitment cuts sustainable debt sharply.

Adopting a novel empirical matching game framework, we investigate how market participants determine their trading partners in credit default swap transactions, which has received less attention in the literature. Using UK regulatory data at the transaction and identity levels for years 2012–2014, we find evidence that market participants prefer trading with organisations with larger total assets and more market activities. Our findings explain the too-big-to-fail problem in the credit default swap market, where market participants believe that regulators may not allow organisations with too many affected creditors to fail. Additionally, dealers with more intermediation activities are more likely selected as trading partners, implying the self-reinforcing nature of the market, which could exacerbate the too-big-to-fail problem. Counterparty risk also plays a significant role in trade pairing, but its effect differs across organisation types. For example, hedge funds prefer trading with risky counterparties before 2014, leading to a greater contagion risk.

This paper models sovereign debt negotiations between a debtor country (player 1) and its international official-sector (player 2) and private-sector (player 3) creditors. The presence of a third player allows for the formation of coalitions between two players. If there are key players that are part of all credible coalitions, such as creditors jointly imposing a partial refinancing agreement on a small debtor country, restructuring negotiations can be impaired and may result in partial default resolutions. These suboptimal bargaining outcomes are triggered when creditors stop extending a full refinancing agreement upon experiencing regret when learning that a partial agreement would have offered a higher return in the past. The introduction of regret allows the model to capture the extend-and-pretend approach that creditors frequently adopt in sovereign debt negotiations. Bounded rationality in the form of concerns for past outcomes, however, is insufficient to create bargaining inefficiencies. Suboptimal refinancing agreements are instead due to the existence of bargaining strength asymmetries, which implies that limiting the dominating presence of key players may help to restore efficiency to sovereign debt negotiations.

The paper justifies the statement concerning the multiplicity of the concept of “bankruptcy”, and interpretes the relevant meanings. The author states that bankruptcy can be considered as: 1. an economic condition, failure to satisfy creditors’ claims, including the failure recognized by the court; 2. a procedure; 3. an objection on behalf of the debtor; 4. a basis for a special settlement regime with creditors and such a special settlement regime itself; 5. a type of enforcement proceedings; 6. a way of authorizing insolvency; 7. a model of administration; 8. a basis and order of liquidation of a legal entity. A preliminary agreement concerning the meaning of the term “bankruptcy” is necessary at all stages of the life of law: when a rule of law is created, applied and when it is being subjected to doctrinal debates aimed at identifying its meaning. Particular attention in the paper is paid to the concepts of insolvency and property insufficiency. The author argues that it is necessary to distinguish the signs of bankruptcy from insolvency, and the former from the grounds for initiating proceedings. In author’s opinion, the introduction of the category of insufficiency of property in 2009 as grounds for mandatory filing for bankruptcy by the debtor’s principal was a step backwards and does not meet the needs of the modern economy. To remedy the situation, the Supreme Court of the Russian Federation introduced the category of objective bankruptcy that is also ambiguous. The paper also focuses on bankruptcy as a special settlement regime with creditors based on the application of the principle of equality of creditors (pari passu). It is stated that this principle is the reason for the emergence, along with the executive proceedings, of a special regime, namely: bankruptcy.

Purpose – Firms and creditors may delay certain decisions in corporate reorganizations because of actions that require coordination. This paper investigates delays in voting on reorganization plans during claimholder general meetings in Brazil. Design/methodology/approach – Using a sample of 120 hand-collected reorganization plans, we present descriptive and regression (OLS, Poisson, negative binomial, and quantile) analyses to show the primary characteristics of delayed votes. Findings – Our results revealed that a high concentration of debt among the different classes of claimholders appeared to be related to fewer delays. Moreover, a higher number of banks and secured creditors with claims in the reorganization appeared to be positively correlated with delays. Finally, we argue that reorganization plans that require additional time to reach a vote are related to divestment proposals. Originality/value – There is still a lack of empirical results based on evaluations of multiple creditor characteristics and the reorganization proposals presented in firms’ reorganization plans. This is the first paper in Brazil to explore how conflicts of interest among different classes of creditors may relate to delays. Our paper contributes to the literature developed by Gilson (1990), Gilson et al. (1990), Brown et al. (1993), Franks and Tourus (1994), Helwege (1999), Ayotte and Morrison (2009), Ponticelli (2012), and Ivashina et al. (2015) regarding the characteristics of delaying reorganization plan votes during restructuring cases. We corroborate the results obtained by previous papers and provide an analysis of the role played by each class of claimholder in delaying plan votes for Brazilian firms Objetivo – Empresas e credores podem adiar certas decisões devido a ações queexigem coordenação nas recuperações de empresas. Este artigo investiga atrasosna votação de planos de recuperação durante as assembleias gerais de credoresno Brasil.Metodologia – Utilizando uma amostra de 120 planos de recuperação coletadosmanualmente, apresentamos análises descritivas e de regressão (mínimos quadradosordinários, ou MQO, Poisson, regressões binomiais negativas e quantílicas) paramostrar as principais características dos atrasos na votação.Resultados – Nossos resultados revelaram que uma alta concentração de dívidaentre as classes de credores está relacionada a menos atrasos. Além disso, umnúmero maior de bancos e credores com garantia real que possuem direitos decrédito na recuperação está positivamente correlacionado com os atrasos. Por fim,argumentamos que os planos de recuperação que requerem tempo adicional paraa votação estão relacionados a propostas de desinvestimento.Contribuições – Ainda faltam resultados empíricos baseados na avaliação decaracterísticas dos vários credores e da proposta de recuperação apresentada no planode recuperação da empresa. Este é o primeiro artigo no Brasil que explora comoos conflitos de interesse entre as classes de credores podem estar relacionados aosatrasos. Nosso artigo contribui para a literatura desenvolvida por Gilson (1990),Gilson et al. (1990), Brown et al. (1993), Franks e Tourus (1994), Helwege(1999), Ayotte e Morrison (2009), Ponticelli (2012) e Ivashina et al. (2015) sobreas características dos atrasos na votação do plano de recuperação durante os casosde reestruturação. Corroboramos os resultados obtidos em trabalhos anteriores efornecemos uma análise do papel desempenhado por cada classe de credores noatraso da votação do plano em empresas brasileiras. Objetivo – Empresas e credores podem adiar certas decisões devido a ações queexigem coordenação nas recuperações de empresas. Este artigo investiga atrasosna votação de planos de recuperação durante as assembleias gerais de credoresno Brasil.Metodologia – Utilizando uma amostra de 120 planos de recuperação coletadosmanualmente, apresentamos análises descritivas e de regressão (mínimos quadradosordinários, ou MQO, Poisson, regressões binomiais negativas e quantílicas) paramostrar as principais características dos atrasos na votação.Resultados – Nossos resultados revelaram que uma alta concentração de dívidaentre as classes de credores está relacionada a menos atrasos. Além disso, umnúmero maior de bancos e credores com garantia real que possuem direitos decrédito na recuperação está positivamente correlacionado com os atrasos. Por fim,argumentamos que os planos de recuperação que requerem tempo adicional paraa votação estão relacionados a propostas de desinvestimento.Contribuições – Ainda faltam resultados empíricos baseados na avaliação decaracterísticas dos vários credores e da proposta de recuperação apresentada no planode recuperação da empresa. Este é o primeiro artigo no Brasil que explora comoos conflitos de interesse entre as classes de credores podem estar relacionados aosatrasos. Nosso artigo contribui para a literatura desenvolvida por Gilson (1990),Gilson et al. (1990), Brown et al. (1993), Franks e Tourus (1994), Helwege(1999), Ayotte e Morrison (2009), Ponticelli (2012) e Ivashina et al. (2015) sobreas características dos atrasos na votação do plano de recuperação durante os casosde reestruturação. Corroboramos os resultados obtidos em trabalhos anteriores efornecemos uma análise do papel desempenhado por cada classe de credores noatraso da votação do plano em empresas brasileiras.

Macro-finance analyses commonly link firms’ borrowing constraints to the liquidation value of physical assets. For U.S. nonfinancial firms, we show that 20% of debt by value is based on such assets (asset-based lending in creditor parlance), whereas 80% is based predominantly on cash flows from firms’ operations (cash flow–based lending). A standard borrowing constraint restricts total debt as a function of cash flows measured using operating earnings (earnings-based borrowing constraints). These features shape firm outcomes on the margin: first, cash flows in the form of operating earnings can directly relax borrowing constraints; second, firms are less vulnerable to collateral damage from asset price declines, and fire sale amplification may be mitigated. Taken together, our findings point to new venues for modeling firms’ borrowing constraints in macro-finance studies.

Asian countries have high demand for U.S. dollars and are sensitive to U.S. dollar funding costs. An important, but often overlooked, component of these costs is the basis spread in the cross-currency swap market that emerges when there are deviations from covered interest parity (CIP). CIP deviations mean that investors need to pay a premium to borrow U.S. dollars or other currencies on a hedged basis via cross-currency swap markets. These deviations can be explained by regulatory changes since the global financial crisis, which have limited arbitrage opportunities and country-specific factors that contribute to a mismatch in the demand and supply of U.S. dollars. We find that an increase in the basis spread tightens financial conditions in net debtor countries, while easing financial conditions in net creditor countries. The main reason is that net debtor countries are, in general, unable to substitute smoothly to other domestic funding channels. Policies that promote reliable alternative funding sources, such as long-term corporate bond market or stable long-term investors, including a “hedging counterpart of last resort,” can help stabilize financial intermediation when U.S. dollar funding markets come under stress.

Purpose This paper aims to revisit the Indian experience on corporate bankruptcy law to answer “why Indian corporate insolvency law structured differently from a manager-driven (pre-Insolvency Code) to manager-displacing model (post-Insolvency Code)?” Design/methodology/approach This paper is qualitative in nature. The paper analyses the prevailing theoretical wisdom in corporate insolvency law in India and examines the practices of Indian bankruptcy regime. Findings The authors argued, considering the corporate ownership composition, the Insolvency and Bankruptcy Code 2016 will not accomplish the intended objective (i.e. the “creditor primacy”). The findings refute with the evolutionary theory, i.e. debt and equity both will tend towards dispersion in outsider system of governance. Originality/value This paper put forward the imprint that Indian corporate insolvency regime is manager-displacing under Law on Books and manager-driven under Law on Practice.

We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies. (JEL E44, E62, F34, H63, G12)

We develop a model in which collateral serves to protect creditors from the claims of other creditors. We find that, paradoxically, borrowers rely most on collateral when pledgeability is high. This is when taking on new debt is easy, which dilutes existing creditors. Creditors thus require collateral for protection against possible dilution by collateralized debt. There is a collateral rat race. But collateralized borrowing has a cost: it encumbers assets, constraining future borrowing and investment. There is a collateral overhang. Our results suggest that policies aimed at increasing the supply of collateral can backfire, triggering an inefficient collateral rat race. Likewise, upholding the absolute priority of secured debt can exacerbate the rat race.

This study aims to explain the position of tax debt and labour right in bankruptcy. The legal research method used in this research using normative research, the legal rules and legal principles used related to bankruptcy law, tax law and labour law will be a reference in describing the problem of the position of tax debt and labour right in bankruptcy cases. The Taxation Law gives a special treatment and higher position on which the tax debt is first to be paid by the debtor and followed by the right borne by the separatist creditor. On the other hand, Law Number 13 of 2003 concerning Employment also regulates that the labour of the wages and other rights of the labour and positioned the labour as preferred creditor on which the privilege is given by the law. However, there are no statements in the Employment Law that stated the position of labour as a preferred creditor is higher than separatist creditor in the matter of bankrupt as what the Taxation Kaw expressed creditor is higher than the separatist creditor within the matter of tax payment. That distinction seems positioned the preferred creditor status of labour is lower than the position of separatist creditor on the matter of right fulfillment in bankruptcy. It is certainty that the statement which stated that the collection of tax debts have the right to preceded than other debts does not fit in this matter. Eventually, there is a decision of Constitutional Court Number 67/PUU-XI/2013 that provides a change within the position labour’s right on the matter of bankruptcy.

One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.

This paper presents a new rationalization for bailouts of sovereign debt in monetary unions, such as those observed during the recent Euro crisis. It introduces a model where member countries of the monetary union are ex-ante identical, and each derives utility from consumption and disutility from the union-wide inflation rate. The union’s central bank is utilitarian and lacks commitment. Countries borrow or save in a market for nominal sovereign debt in response to idiosyncratic income shocks, with countries that receive positive income shocks saving and countries that receive negative income shocks borrowing. Ex post, the monetary union’s central bank will attempt to devalue sovereign debt through surprise inflation, as this will redistribute income from rich creditor countries to poor debtor countries. Creditor countries choose to bailout debtor countries because bailouts will weaken the redistributive motives of the central bank and forestall surprise inflation. As bailouts in this environment constitute a payment from lucky creditor countries to unlucky debtor countries, they mimic a risk-sharing arrangement that insures against income shocks. The payments made by creditor countries are incentive-compatible due to the shared currency and inflation rate in the monetary union. This ability of countries to provide each other with incentive-compatible insurance constitutes a novel theory of optimal currency areas. This insurance benefit of the monetary union is largest for countries with negatively correlated income shocks, in contrast to the classic Mundell-Friedman optimal currency area criterion.

Building on rational choice institutionalism theory and Williamson’s (J Econ Lit 38(3): 595–613, 2000) four-level social analysis framework, we investigate the influence of the informal institution of social trust on debt contract design in an international setting. Using a sample of non-U.S. firms that issue bonds in the U.S. debt market, we find that Yankee bond creditors impose fewer covenants on bond issuers domiciled in countries with a high degree of social trust. We further show that the inverse relationship between debt covenants and the informal institution of social trust is more pronounced for firms from countries with weak formal institutions, as well as for firms with poor corporate governance and greater information opacity. These findings are robust to endogeneity tests, within-country analysis, various empirical models and measures of trust, and alternative hypotheses. We also show that, while a lower level of informal social trust is associated with higher borrowing costs, this relationship weakens when formal covenants are added to the debt contract (i.e., a substitution effect). Our paper contributes to the international business literature by providing new insights into the role of informal institutions (social trust) in cross-border debt contracting.

Governments have created development banks in hopes of accelerating growth. Theoretical growth models that assess the pertinence of these banks are scarce and, none of them analyzes the implication of these banks under weak institutions and underdeveloped financial markets, which are two common problems in poor countries. This article studies the implications of subsidies to producers, a monopoly bank, or to a development bank, for the technology adoption and welfare in a Schumpeterian growth model in which creditors cannot completely eradicate moral hazard. I find that under these circumstances, the innovator will under-invest in research and, although subsidies contribute to a higher level of technology in the economy, they may harm the welfare of the working class. Subsidies to a development bank can be the most effective measure in terms of catching up with advanced economies, but this policy can be the most negative for the economic environment by diverting a large amount of resources from investment in research. Finally, this policy harms workers’ welfare when they finance the subsidy.

The IMF’s recent loan to Brazil is the best seen as a mechanism of political control rather than economic assistance, except in a very unsustainable short run. Thus hard choices between the priorities of Brazil’s working population and those of international creditors cannot be avoided. This essay explores policy options, and goes on to suggest that while the financial sector is certain to dominate American policy discussion in these matters, it would be wiser to view the larger national economic interest of the United States as aligned with those who advocate stable and sustainable national development in Brazil. RESUMO O recente empréstimo do FMI para o Brasil é o mais bem visto como um mecanismo de controle político e não de assistência econômica, exceto em um curto prazo muito insustentável. Assim, escolhas difíceis entre as prioridades da população trabalhadora brasileira e as dos credores internacionais não podem ser evitadas. Este ensaio explora as opções políticas, e continua sugerindo que, embora o setor financeiro esteja certo de dominar a discussão política americana nesses assuntos, seria mais sensato ver o interesse econômico nacional mais amplo dos Estados Unidos alinhado com aqueles que defendem o desenvolvimento nacional sustentável no Brasil.

Joint debts are debts that more than one debtor guarantees mutually. They are sometimes interpreted as a version of the tragedy of the commons. However, a simple model of the dynamic tragedy of the commons fails to capture an important feature of joint debts. The authors model joint debts as a joint borrowing limit game and compare the model with the dynamic tragedy of the commons model. Thereby, the authors show the difference in the achievability of efficiency between these two models and present the conditions for efficiency. The conditions for efficiency are as follows: (i) a not too large economic disparity between the players; (ii) not too many players. The joint borrowing limit game has a broad range of applications because the model can be applied to a case where creditors and debtors expect a debt guarantee of someone unilaterally even without an explicit contract of joint debt. For example, this model can be applied to the Eurosystem that led to Greek overborrowing.

This article presents a reinterpretation of John Locke's contribution to debates about the interest rate in the seventeenth century. It suggests that his argument that England should maintain the ‘natural’ rate, rather than impose a lower rate, was motivated by his theological, moral, and social conceptions of credit and its dependence on trust. In order to solve the endemic shortage of metal coin limiting the growth of monetary exchange in England, Locke stressed that the higher, ‘natural’ rate of interest would facilitate interpersonal borrowing and lending among neighbours, allowing currency to flow more freely around the country. By contrast, while he acknowledged that institutional creditors such as goldsmith-bankers could quicken the circulation of money by issuing debt instruments like bills of exchange, he saw institutional credit as a threat to the moral community. Not only did he question how people could rationally trust financiers without any epistemic apprehension of their personal probity, but he moreover doubted whether individuals accumulating so much money were likely to act trustworthily. Finally, using an otherwise unstudied dialogue about the Bank of England, this article argues Locke extended his criticisms about the threats posted by private banks to the country's nascent system of public credit.

Greece has still not found its way back while its economy has been deteriorating year after year since 2008. It is argued in this article that the central factor of this outcome was the dynamics of financing in the countries most involved in Greek indebtedness that was considerably greater and had a more detrimental influence on the Greek economy than poor fiscal management that different governments could incur. The impetus displayed by financial services did not correspond to the weakness of the real sector which occurs when borrowing and financial flows are used without restriction to meet the interests of creditors. In this work an analysis of the channels that fueled Greek debt is carried out in the context proposed by Minsky where an economy moves from financial stability to a scenario of instability supported in two determining variables: high and exaggerated interest on debt service and the type of agents holding debt assets. The debt-service interest incurred by the government since joining the eurozone and the impetus for financing caused the debt to have a giant snowball effect while the change in debt holders forced the government to comply with strict and onerous government and macroeconomic reforms that directly impacted the ability of Greek governments to pay with negative results on the well-being of society.

The main objective of this paper is to verify the effect of foreign debt on economic growth in sub-Saharan African sub-regions from 1980 to 2017. The paper applies the Generalized Method of Moments (GMM) with robust standard deviations using the Lewbel’s estimator (2012). Results indicate that foreign debt significantly enhances growth in four zones (SADC, EAC, CEMAC and ECOWAS) with different bearable thresholds. This seems to suggest that creditors may be aware that countries do not exceed their bearable threshold at least at regional level.

Banks’ behavior as creditors relies heavily on the content of legal rights granted by the national bankruptcy laws. Using a sample of 87 countries over the period 2005–2016, this paper investigates whether the degree of such legal rights influences the following banking indicators: (1) private credit, (2) bank lending-deposit spread, and (3) foreign banks’ presence. Robust dynamic panel estimates indicate a significant and positive impact only on foreign banks’ presence in countries with a high level of creditors’ protection and bankruptcy systems that encourage the survival of financially distressed firms.

The Insolvency and Bankruptcy Code (IBC) in India ushered in a new era of creditor-in-control regime with an in-built mechanism for time-bound resolution. This article examines the impact of the Code on firm borrowings and cost of funds. Using firm-level data on 4,531 firms for the period 2012–2018, we find that implementation of IBC has had many desirable consequences from a policy perspective. It helped in deleveraging of firms as their reliance on borrowings—whether long-term or short-term—declined. Further analysis suggests that this is especially true for weak and large firms. The stronger creditor protection is, thus, a step in the direction of reducing the burden on banks and further market deepening. JEL Classification: G32, G33, G38, D22, O16

Many southern European economies experience large capital inflows during periods of expansion that are followed by abrupt capital flow reversals when a recession hits. This paper studies the dynamics of cross-border flows between the North and South of Europe in a two-country DSGE model with incomplete international asset markets. Over the business cycle, the direction of capital flows between the two regions can be explained by a model in which common shocks have asymmetric effects on debtor and creditor economies. This mechanism explains why aggregate consumption is more volatile in the South than in the North and generates a higher welfare cost of business cycle fluctuations in the region that experiences procyclical net capital inflows. We also study the adjustment to asymmetric financial shocks.

Ever since the last financial crisis, the efficiency of financial markets has been widely challenged. On the basis of sovereign debt markets in the European Monetary Union (EMU), we tried to contrast some reservations about the market efficiency existing in the literature with findings coming from our empirical analysis of weak-form efficiency. To do so, we first outlined the crux of the efficient market hypothesis. Secondly, we show the main reservations in relation to this concept. Then, after a brief review of outcomes from contributions in this area, we conducted a three-stage empirical procedure that Worthington and Higgs (2006) as well as Borges (2009) had employed to stock markets analysis. Then, the results were evaluated and conclusions were drawn. To sum up, we did confirm the weak-form efficiency on examined sovereign debt markets from the EMU. That suggests that a random process plays a key role in shaping bond yields. Finally, neither theoretical nor practical reservations deflate the weak-form efficiency in the public debt markets of the EMU.

An extensive body of international business research examines how cross-country variations in legal institutions influence corporate finance practices. Building on this literature, as well as the literature on capital structure and product market interactions, we investigate the effect of an important dimension of legal institutions – creditor rights – on the product market performance of highly leveraged firms. Using a sample of 37,422 firms from 60 countries over the 1989–2016 period, we find that strong creditor protection benefits less leveraged firms, but adversely affects highly leveraged firms by increasing the adverse responses of customers, competitors, and employees. The adverse effect of creditor rights on the costs of high leverage is more pronounced for firms in countries with developed debt markets and banking systems, but mostly insignificant for firms in countries with developed equity markets and low information asymmetry. Our study offers new insights into the international business literature and contributes to the debate on the role of creditor protection by uncovering a potential cost based on capital structure and product market interactions.

Loan tranching allows banks to manage risk and facilitate firm financing, whichmay be essential for firms that cannot access investors from stock markets. Weanalyze the determinants and benefits of loan tranching by pooling thetranches of individual loans to create the largest cross-country sample ofsyndicated loans, covering more than 150,000 loans from multinational anddomestic firms. We find that, in addition to market, deal, and borrowercharacteristics, legal and institutional differences impact loan tranching. Strongcreditor protection and efficient debt collection increase the probability oftranching and reduce tranche spreads, ultimately promoting firms’ access todebt. We also find evidence that tranching facilitates the financing ofmultinational firms abroad due to the transfer of legal and culturalinstitutions to foreign subsidiaries. Overall, our results suggest that tranchingplays an important role in reducing a country’s financial development gap andpromotes firms’ access to debt.

It is commonly observed that high grade loans with better ratings are often associated with low recoveries if they default (i.e. with relatively high loss-given-default (LGD)). To address the mismatch problem, this paper proposes a credit risk approach by minimizing LGD for higher rated loans as a risk-rating matching standard in the sense that the decreasing LGD from creditors’ perspective is associated with higher credit rating for the borrower. This standard forces customers’ credit rating of each grade to be optimally determined in correspondence to its LGD, which means the LGD of high grade loans tends to be low. The approach is then tested using three credit datasets from China, i.e. credit data from 2044 farmers, 2157 small private businesses and 3111 SMEs. The empirical results show that the proposed approach indeed guides the way to solve the mismatch phenomenon between credit ratings and LGDs in the existing credit rating literature. By optimally determining credit ratings, the findings derived from this paper help provide a valuable reference for bankers, and bond investors to manage their credit risk.

The paper empirically assesses evidence of bias among bankruptcy judges and predictability of judicial decision making in Serbia. For this purpose, we devised three hypothetical cases that were distributed to judges that preside over bankruptcy cases in Serbia. While the results do not indicate a consistent bias towards either the debtor or the creditor, they show concerning unpredictability of judicial decision making, hence leading to a high level of legal insecurity. Based on responses we observed high heterogeneity among Serbian bankruptcy judges in their interpretation of the bankruptcy laws. This makes allocation of cases to the particular judge a significant determinant for how the debtors and creditors will be treated and how the law will be applied.