Sovereign Debt Restructurings: Preemptive or Post-Default. Issue 1 (1st February 2016)

• Record Type: Journal Article
• Authors: Asonuma, Tamon; Trebesch, Christoph
• Is Part Of: Journal of the European Economic Association. Volume 14:Issue 1(2016:Feb.)
• Page Start: 175
• Page End: 214
• Publication Date: 2016-02-01
• Subjects: F34 -- F41 -- H63; Economics -- Periodicals; Économie politique -- Périodiques; Science économique; Périodique électronique (Descripteur de forme); Ressource Internet (Descripteur de forme); 330
• DOI: 10.1111/jeea.12156
• Languages: English
• ISSNs: 1542-4766

Abstract

Abstract: Sovereign debt restructurings can be implemented preemptively—prior to a payment default. We code a comprehensive new data set 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.