Working Paper: CEPR ID: DP10950
Authors: Tamon Asonuma; Christoph Trebesch
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.
Keywords: Crisis Resolution; Debt Restructuring; Default; Sovereign Debt
JEL Codes: F34; F41; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high default risk ex-ante (G33) | preemptive restructurings (G33) |
| unexpected bad shocks (D80) | defaults (Y60) |
| preemptive restructurings (G33) | lower haircuts (R48) |
| preemptive restructurings (G33) | shorter durations of renegotiation (C41) |
| preemptive restructurings (G33) | lower output losses (H21) |
| high probability of default (G33) | preemptive debt restructurings (G33) |
| preemptive restructurings (G33) | quicker reaccess to international capital markets (F32) |
| high default risk (G33) | more likely to restructure preemptively (G33) |