بحران بدهی های داخلی و عدم پرداخت بدهی های مستقل

Internal and sovereign debt crises occur together and happen more frequently in economies with weak bankruptcy institutions. This paper provides a novel explanation. Internal crises arise because of the inability to liquidate private debtors when many default. In an optimal contract, a successful entrepreneur repays yet an unsuccessful one defaults and liquidates his assets. The bounds on liquidation generate, however, a second equilibrium where domestic borrowers default because others are also defaulting. During these coordinated defaults tax collections fall which increases sovereign default risk. In the model joint debt crises are an optimal response to informational problems in private-sector lending.

Emerging countries experience recurrent financial crises in which private debtors do not pay their private debts and sovereign governments do not pay their international debts. The recent European debt crisis features similar patterns with joint private and sovereign debt crises. This paper provides a novel explanation of these events. The main idea is that crises arise because of the inability to punish private debtors when many of them default at the same time. The crisis is generated by a simple self-fulfilling belief: if all debtors know that all other debtors are going to default, then they all know that they face a small sanction for doing so. During the crisis, government׳s net tax collections fall which can lead to sovereign default. The model is motivated by evidence that during financial crises, defaulters׳ assets are not seized by creditors due to weak bankruptcy institutions. For example, during the Mexican crisis of 1995, the country developed what many Mexicans called the “cultura de no pago” or a culture of non-payment in which few debtors paid their creditors. Creditors were unable to seize the assets of non-performing loans because the courts lacked the capabilities and guidance to manage the systemic bankruptcies effectively.1,2 Countries in East Asia during the 1997 crisis also exhibited fundamental weaknesses in their bankruptcy mechanisms and their judicial system. For example, initially in Indonesia only courts handled liquidations of failing firms. But as courts quickly became overloaded, the Jakarta Initiative Task Force (JITF) was created as a way to allow for less formal workouts. However, both the court system and the JITF had very limited success in expediting the process of non-performing loans. By October 1998, only 69 cases were settled of the 462 cases filed in courts and JITF. Thus, firms were allowed to run even when they were not paying their debts.3 Weak bankruptcy institutions have also played an important role more recently during the European debt crisis. In Ireland, for example, banks suffered large loses due to widespread mortgage defaults. The government then recapitalized the banks with fiscal outlays of about 40% of GDP. However, recent estimates suggest that a substantial portion of these defaults are strategic: homeowners who can pay choose not to pay because they do not think they will get punished and in fact think they might get a write-off from the lenders.4 Hence, weak bankruptcy mechanisms magnified the internal debt crisis and these events strained the government׳s ability to service its sovereign debt. This evidence suggests that an important feature of systemic crises is the inability (or unwillingness) to punish a large number of defaulters. This paper develops a model where the inability to punish a large number of bankrupt debtors is the source of the crisis itself. Our model has the following elements. There is a benevolent government in a small open economy which borrows from foreign risk-neutral lenders to buy public goods. At the same time, a small number of domestic risk-averse entrepreneurs borrow from domestic risk-averse lenders to buy capital goods for use in a productive investment opportunity. The domestic entrepreneurs׳ investment returns are a binary random variable that may equal zero with positive probability; returns are, ex-post, known only to the entrepreneur. The government imposes lump-sum taxes on domestic lenders in order to finance its repayments to the foreign lenders. Liquidation plays a key role in the model. The entrepreneur׳s capital goods can be liquidated to become consumption goods, but liquidation involves a social loss. 5 The equilibrium loan contracts specify repayment/liquidation as a function of the entrepreneurs׳ declarations of success or failure. In an equilibrium contract, a successful entrepreneur will make a payment to the lender without any liquidation. In contrast, an unsuccessful entrepreneur will liquidate some of his capital, and use that to make a payment to the lender. Thus, equilibrium contracts look like standard debt contracts, with default provisions. The key assumption of the model is that there is an upper bound on the total amount of capital that can be liquidated. Hence, if many entrepreneurs default, the lender can only liquidate a small amount of capital from each of them. If the upper bound on aggregate liquidation is sufficiently tight, then a positive probability non-fundamental shock (a sunspot) can generate a coordinated default crisis. In this crisis, domestic entrepreneurs use the non-fundamental shock to coordinate on a default decision, even if they have been successful. During coordinated default crises, successful entrepreneurs default because they know that sanctions will be small given that all other entrepreneurs will also default. The massive default means that the domestic lenders cannot pay their taxes. Without these tax payments, the sovereign cannot repay the foreign lender in full. Indeed, in these crises, it may well be optimal (for risk-sharing reasons) for the foreign lender to make transfers to the sovereign. The government will then give those transfers to the domestic lenders. The existence of coordinated default crises in our model is an example of what is called an implementation problem in the optimal contracting literature. In our model, an equilibrium contract generates a reporting game between entrepreneurs by specifying repayments and liquidations as a function of the joint reports of the entrepreneurs about their outcomes. In one equilibrium of this game, both entrepreneurs tell the truth and induce a constrained Pareto optimal allocation of resources. The key property of our model is that, under some parameter settings, the equilibrium contract allows for a second equilibrium in the reporting game in which both lie. The resultant equilibrium outcome is not constrained Pareto optimal. In our model sovereign and domestic defaults occur simultaneously when the aggregate bound on liquidation is tight. We document that these predictions are borne out in data. Across countries sovereign defaults are often associated with large numbers of domestic defaults, such as bank insolvencies and non-performing bank loans. Moreover, the incidence of these joint debt crises is systematically correlated with the efficacy of bankruptcy institutions across countries. The efficacy of bankruptcy is measured by the average recovery that creditors get during bankruptcy. Empirically, joint crises are more prevalent in countries with low recovery rates. Recoveries explain a considerable fraction of the variation of the incidence of joint debt crises across countries. 1.1. Related literature There is a large literature on implementation problems in contractual design. Our paper is most related to the recent contributions of Bassetto and Phelan (2008) and Bond and Hagerty (2007). As in our paper, their implementation problems emerge because society׳s ability to provide a negative incentive to a given player depends on the number of players who are also supposed to receive such incentives. More concretely, Bassetto and Phelan hypothesize that the probability of any given taxpayer׳s being audited falls if all taxpayers claim to have low incomes. Under this hypothesis, there is an equilibrium in which all taxpayers choose to default on their tax obligations, regardless of their true incomes. Bond and Hagerty assume that resources for crime enforcement cannot be adjusted in response to the level of crime. Again, this technological restriction generates a second inferior equilibrium with large amounts of crime. Our paper is also related to the literature that discusses how financial frictions can generate and exacerbate international financial crises. The papers in this literature have modeled a wide variety of financial frictions. Several papers emphasize that, especially in bad times, domestic banks/borrowers may run short on collateral that is acceptable to foreign lenders (Calvo, 1998, Caballero and Krishnamurthy, 2001 and Chang and Velasco, 2001). Without this collateral, domestic agents face what is often termed a sudden stop to their borrowing from abroad. This paper differs from this prior literature on financial frictions in two important respects. First, in these earlier papers, the various crises emerge because some assets, such as non-tradable debt or long-term debt, are illiquid or non-marketable. In many cases, this illiquidity is assumed to exist and is the reason for the crisis. In our paper, crises arise because of limits to provide repayment incentives to borrowers when many are in default at the same time. The “insufficient incentives” mechanism of this paper stands as a stark alternative to the “insufficient liquidity” mechanism emphasized in the literature. This is especially relevant considering the evidence that during emerging markets crises, defaulting borrowers are the ones that gain the most due to weak bankruptcy institutions. Second, our paper is related to the literature on sovereign default. Although some sovereign default episodes can be rationalized using movements in output or other fundamentals (see Aguiar and Gopinath, 2006 and Arellano, 2008 for such an account of recent sovereign default episode in Argentina), it is widely recognized that the connection between sovereign defaults and economic fundamentals is loose.6 Without a convincing fundamental explanation available, other economists have also turned to a non-fundamental one where debt crises are attributed to panics or more general forms of coordination failures among foreign lenders. Cole and Kehoe (2000) for example emphasize that sovereign debtors might default when foreign lenders refuse to roll over its debt because they believe other lenders may also refuse to do so. Finally, the existing literature points to government׳s bad policies in the form of bailout guarantees as being a source of crises (Eaton, 1987, Burnside et al., 2004 and Schneider and Tornell, 2004). The contractual arrangement of this paper is Pareto optimal, given the upper bound on liquidation. In this environment, government bailout guarantees can be part of an ex-ante optimal arrangement. Intuitively, private agents interact with foreign lenders/insurers only through their government. Because the foreign lenders are risk-neutral, they provide transfers of resources to the home country when the country is doing poorly. These transfers flow through the government to the private sector. They are, in fact, (partial) bailouts. Analyzing debt crises within an optimal contracting structure allows us to pinpoint precisely the source of crises. Within our framework, improving legal institutions domestically to resolve large-scale defaults is the only way to reduce the probability of crises.

Debt crises are characterized by episodes where defaulters׳ assets are not seized by creditors due to weak bankruptcy institutions. Empirically across countries internal crises occur together with sovereign debt and these joint crises happen more frequently in economies with weak bankruptcy institutions. The paper develops an optimal contracting model that is consistent with these empirical facts. In the model, entrepreneurs borrow from a lender to invest in projects that deliver random returns that are private information to entrepreneurs. The key component is that it is impossible to liquidate large amounts of entrepreneurial assets. In the optimal loan contract a successful entrepreneur repays the lender yet an unsuccessful one defaults and liquidates his assets. However, the inability to liquidate extensive asset quantities generates the possibility of a second equilibrium with coordinated defaults. During coordinated default crises, successful entrepreneurs find it optimal to default because the sanction of doing so is small when all other entrepreneurs are defaulting. During these crises, the government׳s tax collections fall and thus it cannot pay the international lender in full. The model shows that, given tight aggregate constraints on liquidation, joint debt crises are an inevitable part of an optimal response to informational problems in private-sector lending.