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Serial Sovereign Defaults and Debt Restructurings

Tamon Asonuma ()

No 2016/066, IMF Working Papers from International Monetary Fund

Abstract: Emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters even with the same external debt-to-GDP ratio. These countries actually have repeated defaults or restructurings in short periods. This paper explains these stylized facts within a dynamic stochastic general equilibrium framework by explicitly modeling renegotiations between a defaulting country and its creditors. The quantitative analysis of the model reveals that the equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults. The model also accords with an additional fact: lower recovery rates (high NPV haircuts) are associated with increases in spreads at renegotiation.

Keywords: WP; credit history; rate of return; utility function; Serial Default; Sovereign Default; Debt Restructuring; Past Credit History; Haircuts; Recovery rates; Risk Premia; recovery rate; default probability; defaulted debt; GDP ratio; credit history ht; Debt renegotiation; Credit; Asset prices; Sovereign debt restructuring; Global (search for similar items in EconPapers)
Pages: 45
Date: 2016-03-16
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