Efficiently Restructuring Sovereign Debt via Arctic Auctions with Convex Costs

2026-06-08

AI Summary

This study addresses the efficient computation of competitive equilibria in Arctic auctions featuring sellers with nontrivial convex costs and supply constraints, motivated by applications in sovereign debt restructuring. The auction is modeled as a quasilinear Fisher market with supply-side costs, and for the case of piecewise-increasing marginal costs, the work establishes—for the first time—the existence of rational equilibria under rational input data and provides the first polynomial-time algorithm to compute them. Methodologically, it extends primal-dual equilibrium flow techniques from linear Fisher markets using polyhedral theory to effectively handle convex cost structures. By overcoming the classical Fisher market limitation of ignoring seller preferences, this research lays a computationally efficient foundation for auction mechanisms capable of expressing complex preferences, thereby advancing institutionally feasible and flexible market designs in global finance.

Abstract

We study the problem of computing competitive equilibria in the Arctic product-mix auction, originally developed for the Icelandic government for exchanging blocked financial accounts, and more recently proposed by IMF staff for sovereign debt restructuring. From the buyers' perspective, the Arctic auction is equivalent to the quasi-linear Fisher market. However, unlike the standard Fisher model, the seller can express rich supply preferences through explicit supply-side costs and constraints. Despite extensive algorithmic literature on Fisher markets, the seller side has not received much attention, and no polynomial-time algorithm was previously known for computing competitive equilibrium when sellers face nontrivial costs. We examine the natural and expressive regime of separable, stepwise-increasing marginal costs that underlie the above-stated applications. Using polyhedral theory techniques, we first show that rational inputs lead to rational-valued competitive equilibria. Motivated by this result, we develop the first polynomial-time algorithm for this setting based on a non-trivial extension of classic primal-dual balanced-flow techniques for linear Fisher markets. Our work provides a robust computational foundation for auctions with sophisticated preferences, paving the way for flexible and institutionally feasible market designs in global finance.

Problem

• sovereign debt restructuring
• Arctic auction
• competitive equilibrium
• convex costs
• Fisher market

Innovation

• Arctic auction
• convex costs
• competitive equilibrium
• polynomial-time algorithm
• Fisher market