Working Paper: CEPR ID: DP17223
Authors: Maximiliano Dvorkin; Juan M. Sanchez; Horacio Sapriza; Emircan Yurdagul
Abstract: The wave of sovereign defaults in the early 1980s and the string of debt crises in subsequent decades have fostered proposals involving policy interventions in sovereign debt restructurings. The global financial crisis and the recent global pandemic have further reignited this discussion among academics and policymakers. A key question about these policy proposals for debt restructurings that has proved hard to handle is how they influence the behavior of creditors and debtors. We address this challenge by evaluating policy proposals in a quantitative sovereign default model that incorporates two essential features of debt: maturity choice and debt renegotiation in default. We find, first, that a rule that tilts the distribution of creditor losses during restructurings toward holders of long-maturity bonds reduces short-term yield spreads, lowering the probability of a sovereign default by 25 percent. Second, issuing GDP-indexed bonds exclusively during restructurings also reduces the probability of default, especially of defaults in the five years following a debt restructuring. The policies lead to welfare improvements and reductions in haircuts of similar magnitude when implemented separately. When jointly implemented, they reinforce each other's welfare gains, suggesting good complementarity.
Keywords: crises; gdp-indexed debt; distribution of creditor losses; default; sovereign debt; maturity; restructuring; country risk; international monetary fund
JEL Codes: F34; F41; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy rule that tilts the distribution of creditor losses toward holders of long-maturity bonds (E43) | reduction in short-term yield spreads (E43) |
| reduction in short-term yield spreads (E43) | lowers the probability of sovereign default by 25% (F34) |
| issuing GDP-indexed bonds exclusively during restructurings (F34) | significantly reduces the probability of default (G33) |
| issuing GDP-indexed bonds exclusively during restructurings (F34) | reduces the probability of default particularly in the five years following a restructuring (G33) |