Serial default and debt renegotiation
Tamon Asonuma ()
MPRA Paper from University Library of Munich, Germany
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 debt-to-GDP ratio. This paper explains this stylized fact 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, consistent with empirical observations. The equilibrium of the model also accords with an additional observed fact: a country for which default terms require less than a 100 percent recovery rate tends to pay a higher rate of return (relative to a risk-free rate) on subsequently issued debt than do defaulting countries that agree to a full recovery rate.
Keywords: Sovereign Default; Serial default; Debt renegotiation; Past credit history; Recovery rates; Interest spreads (search for similar items in EconPapers)
JEL-codes: E43 F32 F34 G12 (search for similar items in EconPapers)
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Working Paper: Serial Default and Debt Renegotiation (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:55139
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