Serial Sovereign Defaults and Debt Restructurings

Abstract

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 external debt-to-GDP ratio. These countries actually have repeated defaults or restructurings in short periods. This paper explains these stylized facts 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. The model also accords with an additional fact: lower recovery rates (high NPV haircuts) are associated with increases in spreads at renegotiation.

Sovereign Debt Restructurings in Belize: Debt Sustainability and Financial Stability Aspects

“…This paper relates to the empirical literature on case studies of sovereign debt restructurings (e.g., Reinhart and Rogoff, 2009;Sturzenegger and Zettelmeyer, 2006;Finger and Mecagni, 2007;Diaz-Cassou et al, 2008;Panizza et al, 2009;Das et al, 2012;Duggar 2013;Erce, 2013;Tomz and Wright, 2013;Asonuma andTrebesch 2016, Asonuma et al 2017b). Among these studies, Sturzenegger and Zettelmeyer, 2006, present detailed histories of default and debt crisis in seven emerging market (EM) during 1998-2005, while Diaz-Cassou et al, 2008, and Finger and Mecagni, 2007 recent sovereign debt restructurings and IMF-supported programs in late-1990s and 2000s.…”

“…Reinhart, Rogoff, and Savastano (2003) argue that debt "intolerance" is highly linked to the phenomenon of serial default due to a vicious cycle in which default weakens a country's institutions in turn making subsequent default more likely Asonuma (2016). theoretically explains that outcomes of previous renegotiation influence the borrowing costs of subsequent bond issuances, making repeated restructuring or default more likely.…”

Belize's 2016-17 Sovereign Debt Restructuring - Third Time Lucky?

“…Among the previous studies, Reinhart, Rogoff and Savastano (2003) and Reinhart and Rogoff (2005) explore empirically the role of past credit history in debt intolerance. Moreover, Asonuma (2016) empirically shows that past defaulters are more likely to default relative to non-defaulters-countries that have not experienced either defaults or restructurings. Eichengreen, Hausmann, andPanizza (2005a, 2005b) and Catao, Fostel and Kapur (2009) show that a vicious cycle of sovereign credit events arises from an inability of countries to issue bonds in their domestic currencies, i.e.…”

“…Many of the restructurings in the Caribbean did not successfully address longer-term sustainability problems-hence the need for repeated debt restructurings. Exceptions to this are the Grenada 2013-15 and the Jamaica 2013 debt restructurings: in these two cases, debt relief was underpinned by a strong economic reform program that combined fiscal consolidation with growth-supporting measures (Asonuma andother 2017a, Okwuokei andvan Selm 2017).…”

“…Comparison between Antigua Barbuda, Belize, Grenada and JamaicaSources: Antigua and Barbuda, Debt Management Unit (2011), Asonuma, Niepelt and Ranciere (2017),Asonuma and Papaioannou (2016),Asonuma and others (2017a, 2017b),Okwuokei and van Selm (2017),…”