International Involuntray Lending and Contingent Default Threat

Document Type

Article

Journal/Book Title/Conference

International Review of Economics and Finance

Volume

12

Publication Date

2003

First Page

237

Last Page

245

Abstract

A simple model of international debt is formulated in strategic form game, where a country in financial crisis and on the verge of default is requesting a new loan. On the other hand, a bank, with exposure to the foreign country's debt, contemplates whether it should issue the new loan. We show that "issue a new loan" and "not default," a Pareto optimum pair of strategies, is stable. Interestingly, we get this result by using a non-cooperative negotiation process, offered by "individual contingent threat situation."

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