The Seniority Structure of Sovereign Debt

Matthias Schlegl

Christoph Trebesch

Mark L. J. Wright, Senior Vice President and Director of Research

May 2019 | Federal Reserve Bank of Minneapolis Working Paper 759

Sovereign governments owe debt to many foreign creditors and can choose which creditors to favor when making payments. This paper documents the de facto seniority structure of sovereign debt using new data on defaults (missed payments or arrears) and creditor losses in debt restructuring (haircuts). We overturn conventional wisdom by showing that official bilateral (government-to-government) debt is junior, or at least not senior, to private sovereign debt such as bank loans and bonds. Private creditors are typically paid first and lose less than bilateral official creditors. We confirm that multilateral institutions like the IMF and World Bank are senior creditors.