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Voluntary sovereign debt exchanges

Juan Hatchondo, Leonardo Martinez and César Sosa Padilla
Authors registered in the RePEc Author Service: Cesar Sosa-Padilla ()

Journal of Monetary Economics, 2014, vol. 61, issue C, 32-50

Abstract: We show that some recent sovereign debt restructurings were characterized by (i) the absence of missed debt payments prior to the restructurings, (ii) reductions in the government's debt burden, and (iii) increases in the market value of debt claims for holders of the restructured debt. Since both the government and its creditors are likely to benefit from such restructurings, we label these episodes as “voluntary” debt exchanges. We present a model in which voluntary debt exchanges can occur in equilibrium when the debt level takes values above the one that maximizes the market value of debt claims. In contrast to previous studies on debt overhang, in our model opportunities for voluntary exchanges arise because a debt reduction implies a decline of the sovereign default risk. This is observed in the absence of any effect of debt reductions on future output levels. Although voluntary exchanges are Pareto improving at the time of the restructuring, we show that eliminating the possibility of conducting voluntary exchanges may improve welfare from an ex ante perspective. Thus, our results highlight a cost of initiatives that facilitate debt restructurings.

Keywords: Sovereign default; Debt restructuring; Voluntary debt exchanges; Long-term debt; Endogenous borrowing constraints (search for similar items in EconPapers)
Date: 2014
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