Sovereign risk: constitutions rule

Abstract

This paper models the executive's choice of whether to reschedule external debt as the outcome of an intra-governmental negotiation process. The executive's necessity of a confidence vote from the legislature is found to provide the rationale for why some democracies may not renegotiate their foreign obligations. Empirically, parliamentary democracies are indeed less prone to reschedule their foreign liabilities or accumulate arrears on them. Most of the democracies that have been able to significantly reduce their debt/GNP ratio without a 'credit incident' were parliamentary. Moreover, countries with stronger political checks on the executive and lower executive turnover have a lower rescheduling propensity. These results suggest that North and Weingast's account of the evolution of institutions in 17th century England gives substantial mileage in understanding the international debt markets in the contemporary developing world.

Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors

“…It is comprised of (i) the debtors' macroeconomic variables-GDP deviation from the trend obtained by applying a Hodrick-Prescott (H-P) filter, external debt-to-GDP ratio, export-to-debt service ratio (both at the end of restructurings), and a dummy variable for an IMF-supported program-; (ii) a global variable e.g., London Interbank Offered Rate (LIBOR), and (iii) a restructuring method variable such as a dummy variable for bond exchanges. For the choice of these controls, we follow the empirical literature on sovereign defaults and debt restructurings, particularly Kohlscheen (2010), Trebesch (2011), Bai and Zhang (2012), and Asonuma (2016).…”

Varying Responses to Common Shocks and Complex Cross-Sectional Dependence: Dynamic Multilevel Modeling with Multifactor Error Structures for Time-Series Cross-Sectional Data

“…Changes in the US prime interest rate reflect the fluctuation of international liquidity and the general cost of international borrowing. Global GDP growth represents the global macroeconomic situation and systemic output shocks (Kohlscheen 2006;Tomz and Wright 2007;Saiegh 2008). All other common shocks are left in the factor error structure term as unobserved factors.…”

Portfolio Managers and Elections in Emerging Economies: How Investors Dislike Political Uncertainty

“…Serial defaulters are also much more common in presidential rather than parliamentary regimes; another reason, for example, for bondholders to be particularly cautious with new policymakers elected in a presidential regime. For instance, between 1976 and 2000, presidential democracies were 5 times more likely to default on external debts than parliamentary democracies according to research conducted by Kohlscheen (2007 and2010).…”