Is to Forgive to Forget? Sovereign Risk in the Aftermath of a Default

Silvia Marchesi, Tania Masi (tania.masi@unich.it) and Pietro Bomprezzi (p.bomprezzi@campus.unimib.it)
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Pietro Bomprezzi: University of Milano Bicocca and CefES

No 475, Development Working Papers from Centro Studi Luca d'Agliano, University of Milano

Abstract: We examine the link between sovereign defaults and credit risk, by taking into account the depth of a debt restructuring and by distinguishing between commercial and official debt. The focus is on debt restructuring events, which take place at the end of a default spell. We use a novel methodology (Jordà and Taylor 2016) to estimate the average treatment effect of a default episode on our outcome variables, agency ratings and bond yield spreads, accounting for the endogeneity of the default. Our results show that the average treatment effect on ratings is negative (and positive for bond spreads) up to seven years following a default, while the opposite holds for a default with official creditors. Our results are robust to using a panel analysis, which allows us to investigate on the importance of the (final) haircut size. Specifically, we and that the rating (spread) variation (increase) is larger for cases with deeper haircuts. Therefore, we and evidence that official and private defaults may have different costs and then induce selective defaults.

Keywords: Sovereign defaults; Haircut; Credit Rating Agencies; bond yield spreads; local projection (search for similar items in EconPapers)
JEL-codes: F34 G15 G24 H63 (search for similar items in EconPapers)
Date: 2021-07-16
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:csl:devewp:475

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