Determinants of Complexity of Sovereign Debt Negotiation

IntroductionThe recent negotiation with Greece and other cases of external indebtedness of developing and developed countries remind about unsolved challenges of sovereign debt management. Frequently, the decisive part of sovereign debt management is its restructuring, which is achieved in the long lasting and complex, multi-party negotiation.While there exists a vast literature about international debt, the negotiation process itself has usually been given less attention. Most of the studies are focused upon formal aspects of negotiation, e.g. modelling the bargaining process with dynamic, stochastic, general equilibrium model. Such problems as the process of negotiation, bargaining phases, behavior of negotiators, structure of negotiation situation, the consequences of multi-actor negotiation have not yet been studied profoundly.There is another aspect of the situation on all financial markets which is associated with their increasing complexity. It is reflected in variety of applications of that term in the public discourse on finance, including also sovereign debt. Negotiation of sovereign debt is by definition a complex endeavor. Its complexity results both from structural characteristics - number of actors, problems of coordination, communication, cooperation and conflict as well as from cognitive boundaries. Recently, complexity of debt restructuring negotiation has even increased due to overall uncertainty in the world economic system and due to new specific determinants of the debt restructuring cases, e.g. the Greece's debt crisis. The survey of literature on sovereign debt management shows that no research has been done on complexity of the sovereign debt management, and sovereign debt negotiation in particular.The aim of the paper is to provide initial framework concepts of complexity of sovereign debt restructuring negotiation referring to a universal collection of characteristics of negotiation. A model of debt restructuring negotiation is elaborated and the set of complexity-related characteristics of negotiation is proposed.Although the term complexity is frequently used in the discourse on negotiation, including debt restructuring negotiation, usually it is defined in an imprecise manner. Therefore the definitions of complexity are explained in the paper in a more rigorous way. The ideas presented in the paper can be used in a deeper understanding of the sovereign debt negotiating processes, their institutional determinants and behavior of the parts involved. The approaches based solely upon statistical analysis and rational assumptions about decision makers are insufficient, especially under the contemporary circumstances.In the first part of the paper, sovereign debt and negotiation associated with its restructuring are discussed. Definitions of 'hard' and 'soft' complexity are presented in the second part. In the third part, the structure and the process of debt restructuring negotiation are depicted. In the final part the attributes of complexity of debt restructuring negotiation are proposed. Potential applications of complexity-related ideas drawn from theory of negotiations are also scrutinized in the last part.1. Sovereign debt negotiation: A descriptive approach1.1. Sovereign debt and its restructuringSovereign debt (public / government / national debt) is issued by a national government. It is theoretically considered to be risk-free, as the government can employ different measures to guarantee repayment, e.g. to increase taxes or to print money. Government debt can embody internal debt (owed to lenders within the country) and external debt (owed to foreign lenders). In practice, there have been multiple cases in which governments could not serve their debt obligations and had to default. As a consequence, investors ask for different yields across countries. The more a country's repayment ability is in question and the riskier sovereign debt becomes, the higher is its yield. …