Dynamics of International Debt Overhang with Two Lender Banks

This paper presents a dynamic formalization of the behaviour of creditor banks on the secondary market for debts. I formulate the problem as an infinite-horizon game with two banks as players where each bank decides in every period either to sell its loan exposure to the debtor country at the present secondary market price, or to wait and keep its exposure to the next period. There exist three types of subgame-perfect equilibria with the property called the time continuation. I consider the relationship between our equilibria and those of the Kaneko-Prokop (1993) one-period approach to the same problem and show that their approach does not lose much of the dynamic nature of the problem. In any equilibrium of the game, each bank waits in every period with high probability. I discuss the implications of these results for the long-run behaviour of banks on the secondary market and the resolution of debt overhang.