Assessing the Appropriate Size of Relief in Sovereign Debt Restructuring

Martin Guzman and Domenico Lombardi ()
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Domenico Lombardi: Oxford Institute for Economic Policy - Centre for International Governance Innovation

No 2018-26, Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) from Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET)

Abstract: This paper offers a principles based approach for assessing the appropriate size of debt relief in sovereign debt restructuring initiatives. We show how to calculate the amount of debt relief that restores sustainability with high probability subject to the satisfaction of sovereign debt restructuring principles. The amount of debt relief is deemed appropriate if it leads to trajectories of economically and politically feasible fixed points for the primary surplus to GDP ratio that satisfy the government’s intertemporal budget constraint in a “high” percent of possible future states of nature. Economic feasibility is defined by natural economic constraints, and political feasibility is defined by the constraints imposed by the restructuring principles. We also provide evidence that shows that sovereign debt restructuring episodes since 1970 have been often followed by subsequent restructurings or defaults shortly afterwards, suggesting that relief amounts to date may have been ‘too little.

Keywords: Sovereign Debt; Sustainability; Restructuring (search for similar items in EconPapers)
JEL-codes: F34 G01 H63 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2018-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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