Take the Short Route: How to Repay and Restructure Sovereign Debt with Multiple Maturities

55 Pages Posted: 13 Dec 2013 Last revised: 17 May 2021

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Manuel Amador

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: December 2013

Abstract

We address the question of whether and how a sovereign should reduce its external indebtedness when default is a significant possibility, with a particular focus on whether a sovereign should buy back or dilute existing long-term sovereign bonds. Our main finding is that when reduction of debt is optimal, the sovereign should remain passive in the long-term bond market during the deleveraging process, retiring long-term bonds as they mature but never actively issuing or buying back these bonds. The only active margin is the short-term bond market, which involves partial roll over of such debt. Any active maturity management, as will typically be required to address rollover crisis risk, will be delayed until the end of the deleveraging process. We also show that there exist a set of Pareto improving debt restructurings in which maturities are shortened; however, these cannot be implemented by trading in competitive secondary markets.

Suggested Citation

Aguiar, Mark and Amador, Manuel, Take the Short Route: How to Repay and Restructure Sovereign Debt with Multiple Maturities (December 2013). NBER Working Paper No. w19717, Available at SSRN: https://ssrn.com/abstract=2367129

Mark Aguiar (Contact Author)

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Manuel Amador

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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