Rescheduling a sovereign debt: a theoretical analysis

If the probability of default increases with the debt burden, the set of feasible rescheduling schemes of a sovereign debt to private creditors can be depicted by an inverted U-shaped curve in the annual repayment-repayment period plane. If both the creditor and the indebted sovereign are risk averse and maximise expected utility from debt repayments and unpaid debt, respectively, the Pareto efficient rescheduling schemes might be located on the upward sloping side of the feasible rescheduling curve, displaying a positive relationship between the renegotiated annual repayment and the renegotiated repayment period, rather than the conventional trade-off. (JEL F34)