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Serial default and debt renegotiation

Tamon Asonuma ()

MPRA Paper from University Library of Munich, Germany

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 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)
Date: 2012-04-02
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Related works:
Working Paper: Serial Default and Debt Renegotiation (2010) Downloads
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