DP10950 Sovereign Debt Restructurings: Preemptive or Post-Default
|Author(s):||Tamon Asonuma, Christoph Trebesch|
|Publication Date:||November 2015|
|Keyword(s):||crisis resolution, debt restructuring, default, sovereign debt|
|JEL(s):||F34, F41, H63|
|Programme Areas:||International Macroeconomics and Finance, Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10950|
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.