Sovereign Cocos

Juan Carlos Hatchondo, Leonardo Martinez, Yasin Onder and Francisco Roch
Additional contact information
Juan Carlos Hatchondo: Western University
Leonardo Martinez: IMF

No 139, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government faces liquidity shocks in the form of an increase of the bondholders’ risk aversion. We find that in spite of reducing the frequency of defaults triggered by liquidity shocks, introducing cocos increases the overall default frequency. By mitigating concerns about liquidity, cocos make indebtedness and default risk more attractive for the government. In contrast, cocos that stipulate debt forgiveness when the government faces the shock, achieve larger welfare gains by reducing default risk.

Pages: 29 pages
Date: 2022-05
New Economics Papers: this item is included in nep-ban and nep-dge
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https://rednie.eco.unc.edu.ar/files/DT/139.pdf (application/pdf)

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Working Paper: Sovereign Cocos (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:139

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