'Incorporating Creditors' Seniority into Contingent Claim Models: Application to Peripheral Euro Area Countries'

IREA Working Paper 2018/03

54 Pages Posted: 7 Mar 2018

See all articles by Marta Gómez-Puig

Marta Gómez-Puig

Economic Theory Department. University of Barcelona

Manish Singh

University of Barcelona; Indira Gandhi Institute of Development Research (IGIDR)

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: February 28, 2018

Abstract

This paper highlights the role of multilateral creditors (i.e., the ECB, IMF, ESM etc.) and their preferred creditor status in explaining the sovereign default risk of peripheral euro area (EA) countries. Incorporating lessons from sovereign debt crises in general, and from the Greek debt restructuring in particular, we define the priority structure of sovereigns' creditors that is most relevant for peripheral EA countries in severe crisis episodes. This new priority structure of creditors, together with the contingent claims methodology, is then used to derive a set of sovereign credit risk indicators. In particular, the sovereign distance-to-default indicator, proposed in this paper (which includes both accounting metrics and market-based measures) aims to isolate sovereign credit risk by using information from the public sector balance sheets to build it up. Analyzing and comparing it with traditional market-based measures of sovereign risk suggests that the measurement and predictive ability of credit risk measures can be vastly improved if we account for the changing composition of sovereigns' balance sheet risk based on creditors' seniority.

Keywords: sovereign default risk, peripheral euro area countries, contingent claims, distance-to-default

JEL Classification: E62, H3, C11

Suggested Citation

Gómez-Puig, Marta and Singh, Manish and Sosvilla-Rivero, Simon, 'Incorporating Creditors' Seniority into Contingent Claim Models: Application to Peripheral Euro Area Countries' (February 28, 2018). IREA Working Paper 2018/03. Available at SSRN: https://ssrn.com/abstract=3131447 or http://dx.doi.org/10.2139/ssrn.3131447

Marta Gómez-Puig

Economic Theory Department. University of Barcelona ( email )

Diagonal 690
Barcelona, 08034
Spain
34-93-4020113 (Phone)
34-93-4039082 (Fax)

Manish Singh

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

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