Voluntary sovereign debt exchanges

Abstract

We show that some recent sovereign debt restructurings were characterized by (i) the absence of missed debt payments prior to the restructurings, (ii) reductions in the government's debt burden, and (iii) increases in the market value of debt claims for holders of the restructured debt. Since both the government and its creditors are likely to benefit from such restructurings, we label these episodes as "voluntary" debt exchanges. We present a model in which voluntary debt exchanges can occur in equilibrium when the debt level takes values above the one that maximizes the market value of debt claims. In contrast to previous studies on debt overhang, in our model opportunities for voluntary exchanges arise because a debt reduction implies a decline of sovereign default risk. This is observed in the absence of any e↵ect of debt reductions on future output levels. Although voluntary exchanges are Pareto improving at the time of the restructuring, we show that eliminating the possibility of conducting voluntary exchanges may improve welfare from an ex-ante perspective. Thus, our results highlight a cost of initiatives that facilitate debt restructurings.

Sovereign Debt Relief and Its Aftermath

“…5 We also document the process of crisis resolution in detail. Benjamin and Wright (2009), Pitchford and Wright (2012), Aguiar and Amador (2013), Hatchondo et al (2014), Kaminsky and Vega-Garcia (2014), and Asonuma and Trebesch (2016). In addition, a small body of empirical work has shed light on specific debt relief episodes, such as the 16 Brady debt reduction deals of the 1990s (Cline 1989;Rieffel 2003;Arslanalp and Henry 2005), or the debt forgiveness for highly indebted poor countries (HIPCs) (Depretis Kraay 2005, 2007;Dias et al 2013).…”

Sovereign Debt Restructurings: Preemptive or Post-Default

“…Hatchondo et al. () focus on “voluntary” sovereign debt exchanges, which they define as an exchange in which (i) the government does not miss any debt payment, (ii) there is a decline in the government's debt burden, and (iii) there are capital gains from participating in the restructuring. In their setup, the decision for a voluntary debt exchange is made simultaneously with the default choice.…”

The output costs of hard and soft sovereign default

“…Most importantly, they are not consistent with the idea of lump-sum default costs. Most dynamic general equilibrium models with defaultable debt assume fixed output costs of a default (for example Aguiar and Gopinath, 2006;Yue, 2010;Arellano and Ramanarayanan, 2012;Hatchondo and Martinez, 2012;Chatterjee and Eyigungor, 2012;Hatchondo et al, 2014;Aguiar et al, 2013;Cole et al, 2016, to name just a few). For calibration purposes, this literature often uses an output loss of two percent in default years.…”