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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 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.


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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 16 Aug 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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