Serial Sovereign Defaults and Debt Restructurings

IMF Working Papers, March 16, 2016

Source details

Author: Tamon Asonuma
Publication date: March 16, 2016
Core finding: Emerging countries that have defaulted in the past are more likely to default again in the future than non-defaulters with the same external debt-to-GDP ratio.
Scope: Explains repeated defaults and restructurings occurring in short periods using a dynamic stochastic general equilibrium framework with explicit modeling of renegotiations between a defaulting country and its creditors.
Quantitative headline: The equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults.
Additional quantitative association: Lower recovery rates (high NPV haircuts) are associated with increases in spreads at renegotiation.

Repeated defaults and restructurings occur in short periods for some emerging countries.
Past default history increases future default likelihood even controlling for the same external debt-to-GDP ratio.
Recovery rates and haircut magnitude are linked to market spreads at renegotiation.

Framework: Dynamic stochastic general equilibrium model that explicitly models renegotiations between a defaulting country and its creditors.
Main model implication:
- The equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults.
Renegotiation implication:
- Lower recovery rates (high NPV haircuts) correspond to increases in spreads at renegotiation.

Subjects: Asset and liability management, Asset prices, Credit, Debt renegotiation, Money, Prices, Public debt, Sovereign debt restructuring
Keywords: Asset prices, Credit, credit history, credit history ht, Debt renegotiation, Debt Restructuring, default probability, defaulted debt, GDP ratio, Global, Haircuts, Past Credit History, rate of return, recovery rate, Recovery rates, Risk Premia, Serial Default, Sovereign debt restructuring, Sovereign Default, utility function, WP