Sovereign CoCos and debt forgiveness

Juan Carlos Hatchondo (), Leonardo Martinez (), Yasin Onder and Francisco Roch

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We study a sovereign default model in which the government issues CoCos (contingent convertible bonds) that stipulate a suspension of debt payments upon a sizeable increase of the global risk premium (and thus, of the government’s borrowing cost). We find that CoCos allow the government to smooth out the effects of risk-premium shocks on consumption, but they increase the default frequency. By suspending debt payments, CoCos imply higher debt levels and thus higher default probabilities after adverse shocks. We also study CoCos that in addition to the payment suspension, stipulate debt forgiveness after adverse shocks. In contrast with no-forgiveness CoCos, debt-forgiveness CoCos reduce debt levels after adverse shocks, thereby reducing default probabilities. Debt-forgiveness CoCos also yield larger welfare gains.

Keywords: Sovereign default; CoCos; debt relief; reprofiling; debt forgiveness squares; efficiency; robustness (search for similar items in EconPapers)
Pages: 34 pages
Date: 2024-10
New Economics Papers: this item is included in nep-dge, nep-inv and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://wps-feb.ugent.be/Papers/wp_24_1096.pdf (application/pdf)

Related works:
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: https://EconPapers.repec.org/RePEc:rug:rugwps:24/1096

Access Statistics for this paper

More papers in Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Nathalie Verhaeghe ().