Working Paper: NBER ID: w20964
Authors: Sebastian Edwards
Abstract: I use data on 180 sovereign defaults to analyze what determines the recovery rate after a debt restructuring process. Why do creditors recover, in some cases, more than 90%, while in other cases they recover less than 10%? I find support for the Grossman and Van Huyk model of “excusable defaults”: countries that experience more severe negative shocks tend to have higher “haircuts” than countries that face less severe shocks. I discuss in detail debt restructuring episodes in Argentina, Chile, Uruguay and Greece. The results suggest that the haircut imposed by Argentina in its 2005 restructuring (75%) was “excessively high.” The other episodes’ haircuts are consistent with the model.
Keywords: Sovereign Default; Debt Restructuring; Recovery Rates; Haircuts
JEL Codes: F34; F41; F65; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| severity of external shocks (F44) | magnitude of debt haircuts (F34) |
| higher bad states of the world index (I31) | lower recovery rates (G33) |
| higher bad states of the world index (I31) | higher haircuts (F31) |
| severity of shocks (E71) | recovery rates (G33) |
| severity of shocks (E71) | investor recovery rates (G33) |
| Argentine restructuring of 2005 (G33) | excessive haircut (Y60) |
| fitted values from regression analysis (C29) | expected magnitude of haircuts (E39) |
| severity of shocks + economic status + context of debt exchange (F65) | excessive haircut in Argentina (Z38) |