Sovereign Debt Restructurings: Preemptive or Post-Default

55 Pages Posted: 27 Nov 2015

See all articles by Tamon Asonuma

Tamon Asonuma

International Monetary Fund Research Department

Christoph Trebesch

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

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Date Written: November 2015

Abstract

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: crisis resolution, debt restructuring, default, sovereign debt

JEL Classification: F34, F41, H63

Suggested Citation

Asonuma, Tamon and Trebesch, Christoph, Sovereign Debt Restructurings: Preemptive or Post-Default (November 2015). CEPR Discussion Paper No. DP10950. Available at SSRN: https://ssrn.com/abstract=2696140

Tamon Asonuma (Contact Author)

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Christoph Trebesch

Kiel Institute for the World Economy ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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