Discussion Paper Details

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Title: Sovereign Debt Restructurings: Preemptive or Post-Default

Author(s): Tamon Asonuma and Christoph Trebesch

Publication Date: November 2015

Keyword(s): crisis resolution, debt restructuring, default and sovereign debt

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Asonuma, T and Trebesch, C. 2015. 'Sovereign Debt Restructurings: Preemptive or Post-Default'. London, Centre for Economic Policy Research.