Repudiation, retaliation, and the secondary market price of sovereign debts

This note is concerned with the relationship between the secondary-market price of sovereign debts and the possibility of repudiation and retaliation. Using the distinction between "good" and "bad" states of world, the debtor countries optimal repudiation rate as well as the creditor's optimal retaliation and reservation price for any repudiation rate are analyzed under the assumption that the debtor and creditor are risk averse and expected-utility maximizers. Matching both debtor and creditor's considerations, the paper presents and discusses the properties of the equilibrium repudiation and retaliation rates and the secondary market price of a sovereign debt.