02080cas a2200265 a 4500 AALejournalIMF018442 230101c9999 xx r poo 0 0eng d 5.00 USD 9781484353691 1018-5941 BD-DhAAL BD-DhAAL Ari, Anil. Debt Seniority and Sovereign Debt Crises / Anil Ari, Giancarlo Corsetti, Luca Dedola. Washington, D.C. : International Monetary Fund, 2018. 1 online resource (43 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Is the seniority structure of sovereign debt neutral for a government's decision between defaulting and raising surpluses? In this paper, we address this question using a model of debt crises where a discretionary government endogenously chooses distortionary taxation and whether to apply an optimal haircut to bondholders. We show that when the size of senior tranches is small, a version of the Modigliani-Miller theorem holds: tranching just redistributes government revenues from junior to senior bondholders, while taxes and government borrowing costs remain unchanged. However, as senior tranches become sufficiently large, default costs on senior debt transpire into a stronger commitment to repay not only the senior tranche, but also the junior one. We show that there is a lower threshold for senior bonds above which tranching can eliminate default on both junior and senior debt, and an upper threshold beyond which the government defaults also on senior debt. Mode of access: Internet Corsetti, Giancarlo. Dedola, Luca. IMF Working Papers; Working Paper ; No. 2018/104 Full text available on IMF http://elibrary.imf.org/view/journals/001/2018/104/001.2018.issue-104-en.xml IMF e-Library