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Federal Reserve Bank of St. Louis
Working Papers
Sovereign Debt Restructurings
Maximiliano Dvorkin
Juan M. Sanchez
Horacio Sapriza
Emircan Yurdagul
Abstract

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


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Maximiliano Dvorkin & Juan M. Sanchez & Horacio Sapriza & Emircan Yurdagul, Sovereign Debt Restructurings, Federal Reserve Bank of St. Louis, Working Papers 2018-13, 25 Jun 2018, revised 14 Mar 2019.
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Keywords: Crises; Default; Sovereign Debt; Restructuring; Rescheduling; Country Risk; Maturity; Dynamic Discrete Choice
DOI: 10.20955/wp.2018.013
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