Sovereign Debt Restructurings: Preemptive or Post-Default
54 Pages Posted: 24 Nov 2015
Date Written: November 24, 2015
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: sovereign debt, default, debt restructuring, crisis resolution
JEL Classification: F340, F410, H630
Suggested Citation: Suggested Citation