Improving Sovereign Debt Restructurings

Maximiliano Dvorkin, Juan Sanchez, Horacio Sapriza and Emircan Yurdagul

No 2019-36, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings. The global financial crisis and the recent global pandemic have further reignited this discussion among academics and policymakers. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features of debt: maturity choice and debt renegotiation in default. We find, first, that a rule that tilts the distribution of creditor losses during restructurings toward holders of long-maturity bonds reduces short-term yield spreads, lowering the probability of a sovereign default by 25 percent. Second, issuing GDP-indexed bonds exclusively during restructurings also reduces the probability of default, especially of defaults in the five years following a debt restructuring. The policies lead to welfare improvements and reductions in haircuts of similar magnitude when implemented separately. When jointly implemented, they reinforce each other’s welfare gains, suggesting good complementarity.

Keywords: Crises; GDP-indexed Debt; Distribution of Creditor Losses; Default; Sovereign Debt; Maturity; Restructuring; Country Risk; International Monetary Fund (search for similar items in EconPapers)
JEL-codes: F34 F41 G15 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-11-15, Revised 2022-04-06
New Economics Papers: this item is included in nep-dge
Note: Publisher DOI: https://doi.org/10.1016/j.jedc.2022.104435
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Journal of Economic Dynamics and Control

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Related works:
Journal Article: Improving sovereign debt restructurings (2022)
Working Paper: Improving Sovereign Debt Restructurings (2022)
Working Paper: Improving Sovereign Debt Restructurings (2022)
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DOI: 10.20955/wp.2019.036

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