By Marco Pagano
How a lot safety should still a country's judicial procedure find the money for collectors? the reply has far-reaching implications for the functioning of credits markets, fairly in constructing areas equivalent to Latin the US, the place creditor rights are asymmetric and enforcement usually lax. Defusing Default makes use of quite a few views and instruments, together with theoretical modeling and cross-country proof, to envision the prices and advantages of shielding creditor rights. Case reviews examine creditor security in Argentina, Brazil, Chile, Costa Rica, Paraguay and Peru. The reviews locate that more beneficial judicial enforcement could support to make extra credits to be had and enhance the final functionality of the credits marketplace. one other discovering is that personal contracting in credits markets, together with information-sharing preparations, might help atone for felony deficiencies and create incentives to restrict default in nations the place judicial enforcement is expensive or useless. ultimately, the booklet explores the political financial system of debt moratoria by way of studying bailouts and financial ruin.
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Extra info for Defusing Default: Incentives and Institutions
Significant at 1 percent. A/ofe: Regression results are from ordinary least squares; the dependent variable is the real interest rate. Robust standard errors are shown in parentheses. 3 for countries. Source: Authors' calculations. Of the macroeconomic controls, only the inflation rate has a statistically significant effect on the real interest rate. A relatively high inflation rate is associated with a relatively high real interest rate. The other macroeconomic variables have the expected signs but are not statistically significant.
The regression results indicate that a high inflation rate and a small (large) government surplus (deficit) limit private PROTECTING CREDITOR RIGHTS 47 sector access to debt financing. The introduction of these new controls does not affect the size and statistical significance of the rule of law variable by very much, but the creditor rights index loses its significance under the new specification. 5). For this reason multicollinearity alone cannot explain the loss of significance of the creditor rights variable.
Protecting the creditor's right to repossess collateral and to be repaid according to absolute priority rules eliminates this ex post overinvestment problem (see Gertner and Scharfstein 1991). 3 The right to repossess collateral is the most fundamental right awarded to creditors. Most other rights are intimately related to or even derived from it. These include the right to introduce restrictive covenants into the loan contract, the right to veto the reorganization of bankrupt firms, the right to take possession of their securities during such reorganizations, and the right to be repaid according to absolute priority in the event of bankruptcy.
Defusing Default: Incentives and Institutions by Marco Pagano