Sovereign Default, Debt Restructuring, and Recovery Rates: Was the Argentinean “Haircut” Excessive?
- 548 Downloads
I use data on 180 sovereign defaults to analyze what determines the recovery rate after a debt restructuring process. Why do creditors recover, in some cases, more than 90 %, while in other cases they recover less than 10 %? I find support for the Grossman and Van Huyk model of “excusable defaults”: countries that experience more severe negative shocks tend to have higher “haircuts” than countries that face less severe shocks. I discuss in detail debt restructuring episodes in Argentina, Chile, Uruguay and Greece. The results suggest that the haircut imposed by Argentina in its 2005 restructuring (75 %) was “excessively high.” The other episodes’ haircuts are consistent with the model.
KeywordsDebt Sovereign Default Restructuring Repudiation Investors’ losses Haircut Argentina Excusable default Recovery rate Greece Chile
JEL ClassificationF340 F410 F650 G150
* I thank Alvaro Felipe García and Jorge Bromberg for their assistance. Subsection 2.2 draws, partially, on a report prepared for White & Case LLP in September, 2012. As always, discussions with Ed Leamer have been very useful. I also thank participants at UCLA’s finance seminar for helpful discussion. I thank George Tavlas for his comments.
- Bedford P, Irwin G (2008) Reforming the IMF's Lending-into-arrears Framework. Bank of England, LondonGoogle Scholar
- Beers DT, Nadeau JS (2014) Introducing a new database of sovereign defaults. Bank of Canada, OttawaGoogle Scholar
- Benjamin D, Wright ML (2009) Recovery before redemption: a theory of delays in sovereign debt renegotiations. Working Paper, University of California at Los Angeles.Google Scholar
- Blustein P (2005) And the money kept rolling in (and out). Public Affairs, New YorkGoogle Scholar
- Chamon M, Costa A, Ricci L (2008) Is there a novelty premium on new financial instruments? The Argentine experience with GDP-indexed warrants. IMF Working Papers 1–40Google Scholar
- Díaz-Cassou J, Erce A, Vázquez-Zamora JJ (2008) Recent episodes of sovereign debt restructurings: a case-study approach. Banco de Espana Occasional Paper (0804)Google Scholar
- Edwards S, Edwards AC (1991) Monetarism and liberalization: The Chilean experiment. University of Chicago Press, ChicagoGoogle Scholar
- Grossman H, Van Huyck JB (1989) Sovereign debt as a contingent claim: excusable default, repudiation, and reputation. National Bureau of Economic Research, Working PaperGoogle Scholar
- IMF Evaluation Office (2004) “The Role of the IMF in Argentina, 1991–2001”. Washington D.C.Google Scholar
- Integrated Network for Social Conflict Research (http://www.systemicpeace.org/inscr/inscr.htm)
- Miyajima K (2006) How to evaluate GDP-linked warrants: price and repayment capacity. International Monetary Fund, Washington, DCGoogle Scholar
- Moody’s Investors Services (2013) “The aftermath of foreign defaults”. In: Sovereign default series, 7 October, 2013Google Scholar
- Peace Research Institute of Oslo (PRIO), Norway (http://www.prio.no/)
- Philippon T (2015) “Fair debt relief for Greece: new calculations” VoxEu. http://www.voxeu.org/article/fair-debt-relief-greece-new-calculations
- Reinhart CM, Rogoff K (2009) This time is different: eight centuries of financial folly. Princeton University Press, PrincetonGoogle Scholar
- Roubini N, Setser B (2004) Bailouts or bail-ins? Responding to financial crises in emerging economies. Peterson Institute Press: All BooksGoogle Scholar
- Sandleris G, Wright ML (2013) GDP-indexed bonds: a tool to reduce macroeconomic risk? The future of sovereign borrowing in EuropeGoogle Scholar
- Sturzenegger F, Zettelmeyer J (2006) Debt defaults and lessons from a decade of crises. MIT Press, CambridgeGoogle Scholar