Risk Management Optimization for Sovereign Debt Restructuring

Andrea Consiglio () and Stavros Zenios

Journal of Globalization and Development, 2015, vol. 6, issue 2, 181-213

Abstract: Debt restructuring is one of the policy tools available for resolving sovereign debt crises and, while unorthodox, it is not uncommon. We propose a scenario analysis for debt sustainability and integrate it with scenario optimization for risk management in restructuring sovereign debt. The scenario dynamics of debt-to-GDP ratio are used to define a tail risk measure, termed conditional Debt-at-Risk. A multi-period stochastic programming model minimizes the expected cost of debt financing subject to risk limits. It provides an operational model to handle significant aspects of debt restructuring: it collects all debt issues in a common framework, and can include contingent claims, multiple currencies and step-up or linked contractual features. Alternative debt profiles – obtained by maturity rescheduling, interest payment concessions or nominal value haircuts – are analyzed for their expected cost-risk tradeoffs. With a suitable re-calculation of the efficient frontier, the risk of debt un-sustainability of alternative risk profiles can be ascertained with a given confidence level. The model is applied to Greece sovereign debt crisis analyzing the suitability of various proposals to restore debt sustainability.

Keywords: conditional Value-at-Risk; debt restructuring; Greek crisis; portfolio optimization; scenario analysis; sovereign debt; stochastic programming; Value-at-Risk (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (12)

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Working Paper: Risk Management Optimization for Sovereign Debt Restructuring (2014)
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DOI: 10.1515/jgd-2015-0015

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