Repudiation, retaliation and the secondary market price of sovereign debts

This paper is concerned with the relationship between the secondarymarket price of sovereign debts and the possibility of repudiation and retaliation. Using the distinction between ‘good ’ and ‘bad ’ states o f world, the indebted 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 credito rare risk averse and expected-utility maximizers. Matching both debtor and creditor’s considerations, the chapter analyzes the Cournot-Nash equilibrium repudiation and retaliation rates and the secondary market price of a sovereign debt.