Sovereign Debt Overhang, Expenditure Composition and Debt Restructurings

University of Surrey Discussion Papers in Economics DP 15/19 (2019)

84 Pages Posted: 23 Sep 2019

See all articles by Tamon Asonuma

Tamon Asonuma

International Monetary Fund Research Department

Hyungseok Joo

Wayne State University - Department of Economics

Date Written: July 19, 2019

Abstract

Sovereigns' public capital influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment experiences severe decline and slow recovery, differs from public consumption and transfers, reduces share in public expenditure, and relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows severe decline and slow recovery in public investment, i.e., "sovereign debt overhang" delay debt settlement. Data support these theoretical predictions.

Keywords: Debt Overhang; Sovereign Debt; Sovereign Default; Debt Restructuring; Public Investment; Public Capital

JEL Classification: F34; F41; H63

Suggested Citation

Asonuma, Tamon and Joo, Hyungseok, Sovereign Debt Overhang, Expenditure Composition and Debt Restructurings (July 19, 2019). University of Surrey Discussion Papers in Economics DP 15/19 (2019). Available at SSRN: https://ssrn.com/abstract=3456125 or http://dx.doi.org/10.2139/ssrn.3456125

Tamon Asonuma (Contact Author)

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Hyungseok Joo

Wayne State University - Department of Economics ( email )

656 W. Kirby
Detroit, MI 48202
United States

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