The Price of Haircuts: Private and Official Default

52 Pages Posted: 4 Jan 2021

See all articles by Silvia Marchesi

Silvia Marchesi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); University of Milan - Centro Studi Luca d'Agliano (LdA) ; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Tania Masi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Pietro Bomprezzi

University of Milan Bicocca

Date Written: January 4, 2021

Abstract

In this paper we examine the link between sovereign defaults and credit risk, by taking into account the depth of a debt restructuring (haircut) and by distinguishing between commercial and official debt. The focus is on debt restructuring events, which take place at the end of a default, or renegotiation spell. Using dyadic data for the relationship between rated countries and agencies, we find that private credit events are more costly than private ones, when it comes to ratings. Moreover, the rating decline is larger for cases with deeper haircuts. Similar results are found when taking bond yield spreads (EMBIG) as measure of a country's creditworthiness. Results are robust to using the local projection approach (Jordà and Taylor 2016) for the identification of causal effects. Therefore, we find evidence that official and private defaults may have different costs and then induce selective defaults. In the wake of the Covid-19 pandemic, since official lending is likely to increase and official debt sustainability is going to become an important concern, understanding the difference between private and official deals has become even more important.

Keywords: Sovereign defaults, Haircut, Credit Rating Agencies, bond yield spreads, local projection

JEL Classification: F34, G15, G24, H63

Suggested Citation

Marchesi, Silvia and Masi, Tania and Bomprezzi, Pietro, The Price of Haircuts: Private and Official Default (January 4, 2021). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 458, Available at SSRN: https://ssrn.com/abstract=3759589

Silvia Marchesi (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy
+39 02 64483057 (Phone)

HOME PAGE: http://https://sites.google.com/site/ssilviamarchesi/home

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

University of Milan - Centro Studi Luca d'Agliano (LdA)

Via P. Amedeo 34
Milano, Mi 20122
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Tania Masi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Pietro Bomprezzi

University of Milan Bicocca ( email )

Milan
Italy

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