Working Paper: NBER ID: w23864
Authors: Tamon Asonuma; Dirk Niepelt; Romain Ranciere
Abstract: Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.
Keywords: Sovereign debt; Haircuts; Bond maturity; Default risk
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 |
|---|---|
| creditor losses (haircuts) (G33) | debt instruments (H63) |
| shorter-term debt (H63) | larger haircuts (F12) |
| increasing short-run default risk (G33) | larger haircuts (F12) |
| maturity of a bond (G12) | haircut suffered (B24) |
| short-term bond prices (E43) | haircut differentials (H73) |
| perceived short-term default risk (G33) | convergence of bond prices (G12) |