Economics at your fingertips  

Sovereign Default Resolution Through Maturity Extension

Gabriel Mihalache ()

Department of Economics Working Papers from Stony Brook University, Department of Economics

Abstract: Sovereign default episodes are eventually resolved by restructuring the debt, through negotiations with the lenders, and implemented by bond swaps and resumption of debt service payments. This process partially compensate lenders for their losses and provide debt relief for the sovereign. The empirical literature studying these events emphasizes that the bulk of debt relief is implemented by lengthening the maturity of debt, rather than changing face value. Countries exit renegotiation with less debt but with a greater share of long-term debt in total, compared to the maturity structure at the time of default. We augment a standard maturity choice model with a post-default renegotiation phase and study whether it can replicate this observed maturity extension in the data. The model is successful in generating this and other key features of renegotiations and maturity choice, but critically only when we assume that countries continue to be temporarily excluded from financial markets after renegotiation, as in the data. A version of the model where the sovereign can immediately resume borrowing following renegotiation features instead a counterfactual reduction in maturity. We interpret these findings in terms of the tension between the sovereign’s preference for consumption smoothing and the inefficiency of debt dilution inherent in long-term debt.

Date: 2017
New Economics Papers: this item is included in nep-cba and nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link) ... 7/Mihalache_1708.pdf First Version, June 2017 (application/pdf) ... ihalache_v2_1708.pdf Revised Version, January 2019 (application/pdf)

Related works:
Journal Article: Sovereign default resolution through maturity extension (2020) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Department of Economics Working Papers from Stony Brook University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().

Page updated 2021-01-20
Handle: RePEc:nys:sunysb:17-08