Despite a steady accumulation of empirical work, there has been no theoretical work attempting to shed light on the role of banks in facilitating public debt exchange offers when creditors face co-ordination problems. In this paper we develop a simple model of financial distress, consistent with institutional characteristics of out-of-court renegotiation of debt. We use an asymmetric, sequential-move global game framework. The model contains three sectors: a firm in financial distress, a well (though not perfectly) informed bank creditor and a diffuse set of small claimants to the firm that interact in an environment of asymmetric information about the firm’s solvency condition. We show that when the bank accepts restructuring, it injects a degree of strategic solidity in the market and contract-revision offers become successful for lower levels of the firm’s fundamentals than when the bank does not interact with other creditors. However, it is shown that making the bank’s concession contingent on high minimum tendering rates undermines the positive information externality of its restructuring action.
