Sovereign Bond Prices, Haircuts and Maturity

Abstract

Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.

Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs

“…One explanation is that bond exchanges are often conducted as one-sizefits-all offers. As a result, bonds with shorter maturity and higher coupon rates usually suffer from higher present value haircuts (for a similar finding see Asonuma et al, 2017 We also consider the bond's governing law (foreign versus domestic law). Chamon et al (2018) show that foreign-law bonds trade at a premium since they are harder to restructure.…”

Sovereign Debt Restructurings in Grenada: Causes, Processes, Outcomes, and Lessons Learned

“…NPV haircuts for Dominica and Dominican Republic are from Cruces and Trebesch (2013); NPV haircuts for Belize 2006-07 and 2012-13 are from Asonuma et al (2017b); NPV haircuts for Saint Kitts and Nevis and Jamaica 2013 are from Asonuma et al (2017a); NPV haircuts for remaining cases are the authors' calculations.…”

“…Sources: Antigua and Barbuda (2011), Asonuma et al (2017aAsonuma et al ( , 2017b, Asonuma and Trebesch (2016), Cruces and Trebesch (2013), Das et al (2012), various IMF staff reports, and authorities' websites.…”

“…Following Zettelmeyer (2006, 2008), we use the exit yield at the completion of exchange. On the contrary, market haircut is defined as (1 -Present value of new debt/Face value of old debt).24 Asonuma et al (2017a) find haircuts on shorter-term debt tend to be larger than those on longer-term debt in Grenada 2004-05 private debt restructuring.25 SeeAsonuma et al (2017b) for the Belize debt restructurings in -07 and 2012 -13, and Das et al (2012 andJahan (2013) for the Dominican Republic and St. Kitts and Nevis restructurings.…”

Gap-Filling Government Debt Maturity Choice

“…Governments actively decide on their debt maturity structure by issuing debt across maturities. The maturity structure of government debt portfolios is important as it affects creditor losses in debt restructurings, long-term interest rates, exposure to fluctuating funding costs, debt sustainability levels, and consequently governments' vulnerability to crises (e.g., Kim (2015), Beetsma et al (2016), and Asonuma et al (2017)). There are a number of established theories of government debt maturity choice, but these theories predominantly focus on funding costs and funding needs (e.g., Cole and Kehoe (2000), Arellano and Ramanarayanan (2012), and Aguiar et al (2016)).…”