Working Paper Revision

Improving Sovereign Debt Restructurings

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, and the recent global pandemic crisis has further reignited this discussion. 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: 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 20 percent. Second, issuing GDP-indexed bonds exclusively during restructurings reduces the probability of repeated defaults by 19 percent. Both policies also lead to welfare improvements of similar magnitude.

Keywords: Crises; GDP-indexed Debt; Distribution of Creditor Losses; Default; Sovereign Debt; Maturity; Restructuring; Country Risk; International Monetary Fund;

JEL Classification: F34; F41; G15;

Status: Published in Journal of Economic Dynamics and Control

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2021-10-01

Number: 2019-36

Note: Publisher DOI:

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