Risk Management Optimization for Sovereign Debt Restructuring

Journal of Globalization and Development, Vol. 6(2), pp. 181–213, Feb. 2016.

The Wharton School Financial Institutions Centre No. 14-10

28 Pages Posted: 11 Aug 2014 Last revised: 22 May 2016

See all articles by Andrea Consiglio

Andrea Consiglio

University of Palermo - d/SEAS

Stavros A. Zenios

University of Cyprus; Bruegel; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: December 1, 2015

Abstract

Debt restructuring is one of the policy tools available for resolving sovereign debt crises and, while unorthodox, it is not uncommon. We propose a scenario analysis for debt sustainability and integrate it with scenario optimization for risk management in restructuring sovereign debt. The scenario dynamics of debt-to-GDP ratio are used to define a tail risk measure, termed "conditional Debt-at-Risk". A multi-period stochastic programming model minimizes the expected cost of debt financing subject to risk limits. It provides an operational model to handle significant aspects of debt restructuring: it collects all debt issues in a common framework, and can include contingent claims, multiple currencies and step-up or linked contractual features. Alternative debt profiles -- obtained by maturity rescheduling, interest payment concessions or nominal value haircuts -- are analyzed for their expected cost-risk tradeoffs. With a suitable re-calculation of the efficient frontier, the risk of debt unsustainability of alternative risk profiles can be ascertained with a given confidence level. The model is applied to Greece sovereign debt crisis analyzing the suitability of various proposals to restore debt sustainability.

Keywords: sovereign debt, restructuring, scenario optimization, stochastic programming, Value-at-Risk, conditional Value-at-Risk, Greek crisis

JEL Classification: C61, C63, D61,E3, E47, E62, F34, G38, H63

Suggested Citation

Consiglio, Andrea and Zenios, Stavros A., Risk Management Optimization for Sovereign Debt Restructuring (December 1, 2015). Journal of Globalization and Development, Vol. 6(2), pp. 181–213, Feb. 2016., The Wharton School Financial Institutions Centre No. 14-10, Available at SSRN: https://ssrn.com/abstract=2478380 or http://dx.doi.org/10.2139/ssrn.2478380

Andrea Consiglio

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

HOME PAGE: http://portale.unipa.it/persone/docenti/c/andrea.consiglio

Stavros A. Zenios (Contact Author)

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893605 (Phone)

HOME PAGE: http://https://www.researchgate.net/profile/Stavros_Zenios

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

University of Pennsylvania - Wharton Financial Institutions Center ( email )

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

HOME PAGE: http://zenios.wordpress.com

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