Asonuma, Tamon, Trebesch, Christoph, (2015), “Sovereign Debt Restructurings: Preemptive or Post-Default”, Centre for Economic Policy Research, November.
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.
Relevant Posts
- Ben Cheikh, Nidhaleddine, Rault, Christophe, (2015), “The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis”, IZA, October.
- Sandri, Damiano, (2015), “Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-ins or Official Transfers?”, IMF Working Paper, WP/15/223, 16 October.