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Working Paper
A Journey in the History of Sovereign Defaults on Domestic-Law Public Debt
We introduce a novel database on sovereign defaults that involve public debt instruments governed by domestic law. By systematically reviewing a large number of sources, we identify 134 default and restructuring events of domestic debt instruments, in 52 countries from 1980 to 2018. Domestic-law defaults are a global phenomenon. Over time, they have become larger and more frequent than foreign-law defaults. Domestic-law debt restructurings proceed faster than foreign ones, often through extensions of maturities and amendments to the coupon structure. While face value reductions are rare, ...
Working Paper
Risk Management for Sovereign Debt Financing with Sustainability Conditions
We develop a model of debt sustainability analysis with optimal financing decisions in the presence of macroeconomic, financial and fiscal uncertainty. We define a coherent measure of refinancing risk, and trade off the risks of debt stock and flow dynamics, subject to debt sustainability constraints and endogenous risk and term premia. We optimize both static and dynamic financing strategies, compare them with several simple rules and consol financing to demonstrate economically significant effects of optimal financing, and show that the stock-flow tradeoff can be critical for ...
Working Paper
Selective sovereign defaults
Breaches in intercreditor equity are common ground during sovereign debt restructurings. In this paper I explore residence-based breaches by studying patterns of discrimination between residents and foreign creditors during debt restructurings. I frame the analysis with a simple model of a government's strategic decision to differentiate between the servicing of its domestic and its external debt. In the model, the basic trade-off facing the authorities is to default on external debt and in so doing restricting private access to international capital markets or to default on domestic debt, ...
Working Paper
Bank and sovereign risk feedback loops
Measures of Sovereign and Bank Risk show occasional bouts of increased correlation, setting the stage for vicious and virtuous feedback loops. This paper models the macroeconomic phenomena underlying such bouts using CDS data for 10 euro-area countries. The results show that Sovereign Risk feeds back into Bank Risk more strongly than vice versa. Countries with sovereigns that are more indebted or where banks have a larger exposure to their own sovereign, suffer larger feedback loop effects from Sovereign Risk into Bank Risk. In the opposite direction, in countries where banks fund their ...
Working Paper
Sovereign debt restructurings and the IMF: implications for future official interventions
This paper studies the role played by the IMF during sovereign debt restructurings and extracts lessons for future official interventions. To do so, I compare twelve recent debt restructurings. I begin by detailing the main features (?restructuring strategies?) of each episode. I then analyze the involvement of the Fund and relate it to the above-cited strategies. Despite the wide heterogeneity both in restructuring strategies and in the scope of IMF?s involvement, the Fund exerted a substantial influence. This influence came, not only through the provision of official finance and by setting ...
Working Paper
Does the IMF's official support affect sovereign bonds maturities?
This paper looks at whether the tendency of some governments to borrow short term is reinforced by financial support from the International Monetary Fund. I first present a model of sovereign debt issuance at various maturities featuring endogenous liquidity crises and maturity mismatches due to financial under-development. I use the model to analyse the impact of IMF lending during debt crises on the sovereign's optimal maturity structure. Within the model, although IMF assistance is able to catalyse private flows, this provides incentives for government to issue larger amounts of short-term ...
Working Paper
Catalytic IMF? a gross flows approach
The financial assistance the International Monetary Fund (IMF) provides is assumed to catalyze fresh investment. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the IMF?s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we find significant differences in how resident and foreign investors react to IMF programs as well as in inward and outward flows. While IMF lending does not catalyze ...
Working Paper
Official Debt Restructurings and Development
Despite the frequency of official debt restructurings, little systematic evidence has been produced on their characteristics and implications. Using a dataset covering more than 400 Paris Club agreements, this paper fills that gap. It provides a comprehensive description of the evolving characteristics of these operations and studies their impact on debtors. The progressive introduction of new terms of treatment gradually turned the Paris Club from an institution primarily concerned with preserving creditors? claims into an instrument to foster development in the world?s poorer nations, among ...
Working Paper
Sovereign debt crises: could an international court minimize them?
This paper discusses the merits of the statutory approach to sovereign debt crises. It presents a model of sovereign debt roll-overs where, in the event of a liquidity crisis, a Sovereign Bankruptcy Court has powers to declare a standstill on debt payments. The model shows the ability of the Court to mitigate the coordination problem inherent to roll-overs in sovereign debt markets. Moreover, the scale of the coordination problem is reduced regardless of the quality of the information handled by the Court. The mere existence of the Court forces investors to focus on its course of action ...
Working Paper
Banking on seniority: the IMF and the sovereign’s creditors
The programs designed by the International Monetary Fund during the Global Financial Crisis have shown more awareness of the importance of domestic demand for the prospects of economic recovery. Yet, the IMF has continued to do little about the late payments made by governments to domestic creditors and suppliers. In contrast, the greater protection historically awarded by the IMF to foreign creditors has endured throughout the recent crisis. The paper suggests that, in order to adequately balance foreign creditor seniority and growth objectives, the IMF may sometimes need to emphasize ...