Sovereign Cocos
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Summary:
We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government faces liquidity shocks in the form of an increase of the bondholders' risk aversion. We find that in spite of reducing the frequency of defaults triggered by liquidity shocks, introducing cocos increases the overall default frequency. By mitigating concerns about liquidity, cocos make indebtedness and default risk more attractive for the government. In contrast, cocos that stipulate debt forgiveness when the government faces the shock, achieve larger welfare gains by reducing default risk.
Series:
Working Paper No. 2022/078
Subject:
Asset and liability management Consumption Contingent convertible capital Debt default Debt relief External debt Financial sector policy and analysis National accounts Return on investment
Frequency:
regular
English
Publication Date:
April 29, 2022
ISBN/ISSN:
9798400207648/1018-5941
Stock No:
WPIEA2022078
Pages:
26
Please address any questions about this title to publications@imf.org