The Economist discusses the consequences of issuing sovereign debt under foreign law. Investors in Greek government debt did better if they owned paper governed by English law—these series escaped the retroactive addition of collective-action clauses that Greece added to its domestic law bonds in 2012 before renegotiating with its creditors. For Argentine debt the situation may be reversed, due to the New York court decision in the case of Elliott Management against the Republic of Argentina. Indeed, default risk might be lower for Argentine domestic-law bonds.
Tag Archives: Sovereign debt
Haircut Estimates for 180 Sovereign Debt Restructurings
Juan Cruces and Christoph Trebesch have posted data on 180 sovereign debt restructurings between 1978 and 2010. They analyse this data in a paper forthcoming in the American Economic Journal: Macroeconomics.
Cruces and Trebesch consider distressed restructurings of medium and long-term public or publicly guaranteed debt with foreign private creditors (including commercial banks and bondholders but excluding official creditors organised in the Paris Club) that were ever finalized. Their preferred haircut measure varies between -10% (Brazil, February 1983) and 97% (Republic of Yemen, February 2001).
“Debt-Maturity without Commitment,” CEPR, 2008
CEPR Discussion Paper 7093, December 2008. PDF.
We analyze how sovereign risk paired with social costs of default shapes the maturity structure of public debt. A government without commitment power balances benefits of default, due to tax savings, and costs, due to output losses. Debt issuance affects subsequent default and rollover decisions and thus, current debt prices. This induces welfare costs beyond the consumption smoothing benefits from the marginal unit of debt. The equilibrium choice of short- versus long-term debt issuance minimizes these welfare costs. Consistent with empirical evidence, closed-form solutions of the model predict an interior maturity structure with positive gross positions and a shortening of the maturity structure during times of crisis and low output. In simulations, the model replicates additional features of the data.