Sovereign Defaults: The Price of Haircuts

86 Pages Posted: 14 Oct 2011

See all articles by Juan J. Cruces

Juan J. Cruces

Universidad Torcuato Di Tella - School of Business

Christoph Trebesch

Kiel Institute for the World Economy; Centre for Economic Policy Research (CEPR)

Date Written: October 13, 2011

Abstract

A main puzzle in the sovereign debt literature is that defaults have only minor effects on subsequent borrowing costs and access to credit. This paper comes to a different conclusion. We construct the first complete database of investor losses ('haircuts') in all restructurings with foreign banks and bondholders from 1970 until 2010, covering 180 cases in 68 countries. We then show that restructurings involving higher haircuts are associated with significantly higher subsequent bond yield spreads and longer periods of capital market exclusion. The results cast doubt on the widespread belief that credit markets 'forgive and forget.'

Keywords: sovereign debt crises, restructuring, reputation

JEL Classification: F340, G150

Suggested Citation

Cruces, Juan J. and Trebesch, Christoph, Sovereign Defaults: The Price of Haircuts (October 13, 2011). CESifo Working Paper Series No. 3604. Available at SSRN: https://ssrn.com/abstract=1943411

Juan J. Cruces

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina
+5411-5169-7301 (Phone)
+5411-5169-7347 (Fax)

HOME PAGE: http://www.utdt.edu/profesores/cruces

Christoph Trebesch (Contact Author)

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, D-24100
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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