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

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
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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