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Sovereign Defaults: has the current system resulted in lasting (re)solutions?

Rodrigo Mariscal, Andrew Powell, Guido Sandleris and Pilar Tavella

Business School Working Papers from Universidad Torcuato Di Tella

Abstract: The current system of sovereign debt renegotiation has tended to produce restructuring agreements with low haircuts and relatively few events with deeper haircuts. Although this may seem like a successful outcome we uncovered a new empirical fact that throws some doubts on this interpretation, namely that renegotiations that end up in relatively low haircuts are frequently followed by a subsequent renegotiation soon afterwards. Low haircuts and re-renegotiations seems to be the name of the game under the current system. Yet most models of sovereign default consider only a single type of default and ignore multiple renegotiations completely. In this paper, we develop a DSGE model where countries can default in different ways and in which multiple credit events are possible. We solve the model numerically and show how countries may default in different ways and renegotiate debt multiple times. We discuss how recent changes in the international financial architecture may affect the way in which countries default in the future.

Pages: 24 pages
Date: 2015
New Economics Papers: this item is included in nep-cba and nep-dge
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