The Perils of Bilateral Sovereign Debt / Francisco Roldan, César Sosa-Padilla.

Format:

Book

Author/Creator:

Roldan, Francisco.

Contributor:

Sosa-Padilla, César.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w35590.

NBER working paper series no. w35590

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2026.

Summary:

Motivated by the emergence of new official creditors outside the Paris Club framework, we study the interaction between senior official lending and market debt. We develop a quantitative sovereign default model featuring a large senior lender with whom borrowing terms are negotiated. Obtaining more net financing from the market strengthens the government's bargaining position and improves bilateral terms. This endogenous cross-elasticity erodes the discipline of spreads and amplifies debt dilution, leading to welfare losses even as bilateral borrowing helps avert some defaults ex-post. With pre-specified rules, rewarding market issuance can be enough to generate such losses, and an optimal rule instead raises bilateral rates with net market financing. The direction of the cross-elasticity can thus guide in practice the assessment of new forms of bilateral sovereign debt.

Notes:

August 2026.

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