Serial default and debt renegotiation

Emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters even with the same debt-to-GDP ratio. This paper explains this stylized fact within a dynamic stochastic general equilibrium framework by explicitly modeling renegotiations between a defaulting country and its creditors. The quantitative analysis of the model reveals that the equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults, consistent with empirical observations. The equilibrium of the model also accords with an additional observed fact: a country for which default terms require less than a 100 percent recovery rate tends to pay a higher rate of return (relative to a risk-free rate) on subsequently issued debt than do defaulting countries that agree to a full recovery rate

Sovereign defaults, external debt and real exchange rate dynamics

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis, using the case of Argentina�s default in 2001, replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign�s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation

Sovereign defaults, external debt and real exchange rate dynamics

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis, using the case of Argentina�s default in 2001, replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign�s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation

Serial default and debt renegotiation

Emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters even with the same debt-to-GDP ratio. This paper explains this stylized fact within a dynamic stochastic general equilibrium framework by explicitly modeling renegotiations between a defaulting country and its creditors. The quantitative analysis of the model reveals that the equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults, consistent with empirical observations. The equilibrium of the model also accords with an additional observed fact: a country for which default terms require less than a 100 percent recovery rate tends to pay a higher rate of return (relative to a risk-free rate) on subsequently issued debt than do defaulting countries that agree to a full recovery rate

Sovereign Debt Restructurings: Preemptive or Post-Default

Sovereign debt restructurings can be implemented preemptively - prior to a payment default. We code a comprehensive new dataset and find that preemptive restructurings (i) are frequent (38% of all deals 1978-2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the fit with the data and explains the sovereign’s optimal choice: preemptive restructurings occur when default risk is high ex-ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions

Sovereign Debt Restructurings: Preemptive or Post-Default

Sovereign debt restructurings can be implemented preemptively - prior to a payment default. We code a comprehensive new dataset and find that preemptive restructurings (i) are frequent (38% of all deals 1978-2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the fit with the data and explains the sovereign’s optimal choice: preemptive restructurings occur when default risk is high ex-ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions