Sovereign default and debt renegotiation

Vivian Yue

Journal of International Economics, 2010, vol. 80, issue 2, 176-187

Abstract: This paper develops a small open economy model to study sovereign default and debt renegotiation for emerging economies. The model features both endogenous default and endogenous debt recovery rates. Sovereign bonds are priced to compensate creditors for the risk of default and the risk of debt restructuring. The model captures the interaction between sovereign default and ex post debt renegotiation. We find that both debt recovery rates and sovereign bond prices decrease with the level of debt. In a quantitative analysis, the model accounts for the debt reduction, volatile and countercyclical bond spreads, countercyclical trade balance, and other empirical regularities of the Argentine economy. The model also replicates the dynamics of bond spreads during the debt crisis in Argentina.

Keywords: Sovereign; default; Debt; renegotiation; Recovery; rate; Sovereign; debt; spreads (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (277)

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Working Paper: Sovereign Default and Debt Renegotiation (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:80:y:2010:i:2:p:176-187

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