Working Paper: NBER ID: w17551
Authors: Daniel A. Dias; Christine J. Richmond; Mark L.J. Wright
Abstract: The stock of sovereign debt is typically measured at face value. This is a misleading indicator when debts are issued with different contractual forms. In this paper we construct a new measure of the stock of external sovereign debt for 100 developing countries from 1979 to 2006 that is invariant to contractual form, and illustrate five problems with debt stocks measured at face value. First, we show that correcting for differences in the contractual form of debt paints a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external sovereign debt. Second, rankings of indebtedness across countries, which were historically used to define eligibility for debt forgiveness, are sometimes inverted once we correct for differences in contractual form. Third, the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by between 40 to 70 percent once model-consistent measures of debt are used. Fourth, we show how the spread of aggregation clauses in debt contracts which award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts. Fifth, we show how the use of contractual face values gives issuing countries the ability to manipulate their debt stock data, and illustrate the use of these techniques in practice.
Keywords: sovereign debt; external debt; debt measurement; contractual forms; debt sustainability
JEL Codes: E01; F30; F34; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Measuring sovereign debt at face value (H63) | Distorted understanding of actual indebtedness (F34) |
| Differences in contractual forms of debt (F34) | Distorted understanding of actual indebtedness (F34) |
| Adjusting for differences in debt structures (G32) | Changes in quantitative picture of developing country debt (F34) |
| Using new measure (C52) | Deterioration of empirical performance of benchmark models of sovereign debt (E19) |
| Introduction of aggregation clauses in debt contracts (G33) | Inefficiencies in debt restructuring (G33) |
| Manipulation of reported debt levels (H63) | Affects perceived fiscal health of countries (F65) |