Federal Reserve Bank of St. Louis
Working Papers
Sovereign Debt Restructurings
AbstractSovereign 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.
Cite this item
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.
JEL Classification:
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
Keywords: Crises; Default; Sovereign Debt; Restructuring; Rescheduling; Country Risk; Maturity; Dynamic Discrete Choice
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