Serial Sovereign Defaults and Debt Restructurings

Author/Editor:

Tamon Asonuma

Publication Date:

March 16, 2016

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2016/066

Subject:

Asset and liability management Asset prices Credit Debt renegotiation Money Prices Public debt Sovereign debt restructuring

English

Publication Date:

March 16, 2016

ISBN/ISSN:

9781513596648/1018-5941

Stock No:

WPIEA2016066

Pages:

45

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