Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors

Abstract

Foreign creditors’ business cycles influence both the process and the outcome of sovereign debt restructurings. We compile two datasets on creditor committees and chairs and on creditor business and financial cycles at the restructurings. We find that when creditors experience high GDP growth, restructurings are delayed and settled with smaller haircuts. To rationalize these stylized facts, we develop a theoretical model of sovereign debt with multiround renegotiations between a risk averse sovereign debtor and a risk averse creditor. The quantitative analysis of the model shows that high creditor income results in both longer delays in renegotiations and smaller haircuts. Our theoretical predictions are supported by data.

Sovereign Debt Overhang, Expenditure Composition and Debt Restructurings

“…This, in turn, leads to debt accumulation, and later to a default (Aguiar et al 2009). 14 In the restructuring phase, slow recovery of productivity, prohibition on external borrowing, and the government's consumption smoothing motive and impatience generate both slow public capital accumulation and lengthy renegotiations which interact with each other. Public capital accumulation is slow both because external borrowing is prohibited until the government reaches a settlement with its creditors, and because the impatient government with consumptionsmoothing motive continues to be willing to stabilize public consumption and transfers for household utility.…”

“…Lastly, the theoretical work on sovereign debt restructurings models the outcome of default and debt renegotiation as bargaining between a sovereign debtor and its creditors. 7 With multiround renegotiations, both Benjamin and Wright (2013) and Bi (2008) explain that recovery of the debtor's repayment capacity generates delays, and Asonuma and Joo (2019) show that both the debtor's repayment capacity and its risk averse creditor's consumption-smoothing motive interact and drive longer delays. On the contrary, Bai and Zhang (2012) find that delays arise due to information asymmetry between the debtor and its creditors.…”

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

“…7,8 Diaz-Cassou et al (2008) and Erce (2013) examine the role played by the IMF during sovereign debt restructurings in the region. Focusing on countryspecific issues over longer horizons, Asonuma et al (2017) discuss Belize's two sequential debt restructurings and debt sustainability considerations without IMF-supported programs. The present paper fills a gap in the literature of sovereign debt restructurings by focusing specifically on Grenada's two sequential restructurings with IMF-supported programs.…”

“…Most bond exchanges have been completed within one or two years, although sovereign bondholders tend to be dispersed. Consultations with creditor committees-normally comprised of groups of five to 20 representative bondholders-have been useful in tailoring an exchange offer that suited both creditor and debtor demands and increased participation (Asonuma and Joo, 2017). High participation rates (of more than 90 percent) have been featured in recent sovereign bond exchanges.…”

Resolving sovereign debt crises: the role of political risk

“…They find that a larger number of creditors and the presence of 'vulture' funds increase the likelihood of strategic holdups. Asonuma and Joo (2016) show how the business cycle in creditor countries can influence creditor risk aversion and thereby the duration of debt renegotiations with foreign governments. Also Gai et al (2004), Ghosal and Miller (2003) and Haldane et al (2005) highlight creditor characteristics, coordination problems or moral hazard as channels driving inefficiencies and delays in crisis resolution.…”