Selective Sovereign Defaults

Abstract

Breaches in intercreditor equity are common ground during sovereign debt restructurings. In this paper I explore residence-based breaches by studying patterns of discrimination between residents and foreign creditors during debt restructurings. I frame the analysis with a simple model of a government's strategic decision to differentiate between the servicing of its domestic and its external debt. In the model, the basic trade-off facing the authorities is to default on external debt and in so doing restricting private access to international capital markets or to default on domestic debt, thereby curtailing the banking sector's capacity to lend. I test the model's conclusions by analyzing 11 recent sovereign restructurings. After distinguishing neutral cases where the sovereign treated creditors equitably and instances of discrimination against residents and foreigners, I present evidence in support of the model. The origin of liquidity pressures, the robustness and depth of the banking system and the extent of the corporate sector's reliance on foreign capital markets vis-a-vis domestic credit markets have the potential to explain the patterns of discrimination observed in the data. JEL codes: F34, E65

Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets

“…The authorities often react to debt problems by coercing local banks to hold sovereign debt (in non-market terms), aggravating the situation in an event of default(Díaz-Cassou et al, 2008).11 The effects are specific to each episode, but estimated fiscal costs of the median systemic banking crisis stand at 15.5% of GDP, with public debt increasing by around 30% of GDP.12 Erce (2012) suggests that the degree of bank intermediation strongly affects a debt restructuring's ripple effect through the economy.13 They further argue that the composition of fiscal stimulus affects the length of crises. There is a trade-off between boosting aggregate demand (short-run) and productivity growth (long-run).…”

Banking on Seniority: The IMF and the Sovereign's Creditors

“…However, once the sovereign defaults on foreign debt, nonresidents tend to bear the burden of the restructuring. The financial sector's health is key in this sequencing (Erce ). Indeed, the Argentine and Jamaican banking sectors were perceived to be able to withstand the restructuring .…”

The Seniority Structure of Sovereign Debt

“…In addition, some work has been done on the differential treatment of domestic as opposed to international sovereign creditors both theoretically (in particular, Guembel and Sussman, 2009;Broner et al, 2010Broner et al, , 2014 and empirically. On the empirical side, Sturzenegger and Zettelmeyer (2007), Erce and Diaz-Cassou (2010), Kohlscheen (2010), Erce (2012), and Meyer (2019) find mixed evidence on discrimination between domestic and external creditors, either by conducting case studies or by using Standard & Poor's binary simple indicator of external and domestic defaults. Our paper expands this literature by providing the first systematic analysis of discrimination between different classes of external creditors.…”