Sovereign Debt Restructuring and Credit Recovery

Violeta A. Gutkowski

No 2024-015, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper focuses on the significant growth of domestic credit once the debt is restructured and shows that is not correlated with the size of the haircut. Second, it performs an event study around Ecuador’s sovereign default and restructuring of 2008-2009 to study changes in domestic bank lending behavior. After external debt restructuring, private lending increased the most for banks highly exposed to public debt. Finally, it provides a simple model were uncertainty about the return on government external debt during default has spillover effects on the domestic economy by creating dispersion in beliefs across domestic banks, which leads to a misallocation of credit. External debt restructuring eliminates domestic belief heterogeneity by making the return on bonds observable to everyone. This simple framing is not only consistent with the substantial growth in domestic credit upon debt restructuring but also with its independence from the haircut size observed in the data.

Keywords: banks; beliefs; sovereign debt restructuring; uncertainty (search for similar items in EconPapers)
JEL-codes: D8 E44 H63 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2024-07-08
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-opm
Note: Publisher DOI: https://doi.org/10.31389/eco.409
References: View references in EconPapers View complete reference list from CitEc
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Published in Economia, Journal of the Latin American and Caribbean Economic Association

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:98514

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DOI: 10.20955/wp.2024.015

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