Sovereign Debt Restructurings: Preemptive or Post-Default
55 Pages Posted: 27 Nov 2015
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Sovereign Debt Restructurings: Preemptive or Post-Default
Date Written: November 2015
Abstract
Sovereign debt restructurings can be implemented preemptively - prior to a payment default. We code a comprehensive new dataset and find that preemptive restructurings (i) are frequent (38% of all deals 1978-2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the fit with the data and explains the sovereign's optimal choice: preemptive restructurings occur when default risk is high ex-ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions.
Keywords: crisis resolution, debt restructuring, default, sovereign debt
JEL Classification: F34, F41, H63
Suggested Citation: Suggested Citation