Working Paper

Sovereign Debt Restructurings


Abstract: Sovereign debt crises involve debt restructurings characterized by a mix of face-value haircuts and maturity extensions. The prevalence of maturity extensions has been hard to reconcile with economic theory. We develop a model of endogenous debt restructuring that captures key facts of sovereign debt and restructuring episodes. While debt dilution pushes for negative maturity extensions, three factors are important in overcoming the effects of dilution and generating maturity extensions upon restructurings: income recovery after default, credit exclusion after restructuring, and regulatory costs of book-value haircuts. We employ dynamic discrete choice methods that allow for smoother decision rules, rendering the problem tractable.

Keywords: Crises; Default; Sovereign Debt; Restructuring; Rescheduling; Country Risk; Maturity; Dynamic Discrete Choice;

JEL Classification: F34; F41; G15;

https://doi.org/10.20955/wp.2018.013

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2019-02-27

Number: 2018-13

Pages: 77 pages