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Is to Forgive to Forget? Sovereign Risk in the Aftermath of Private or Official Debt Restructurings

Author

Listed:
  • Silvia Marchesi

    (University of Milano-Bicocca
    Centro Studi Luca d’Agliano
    CefES)

  • Tania Masi

    (“G. d’Annunzio” University of Chieti-Pescara
    CefES)

  • Pietro Bomprezzi

    (University of Milano-Bicocca
    CefES)

Abstract

We examine the link between sovereign defaults and credit risk by distinguishing between commercial and official debt and by taking into account the extent of the final restructuring events, which take place at the end of a default spell. We use a local projection-based approach, combined with propensity score weighting (Jordà and Taylor 2016), to estimate the average treatment effect of the final restructuring on our outcome variables of agency ratings and bond yield spreads. Our results show that the average treatment effect on ratings is negative (and positive for bond spreads) up to seven years following the final restructuring with private creditors, while the opposite holds for official creditors. Furthermore, our results are robust to using a panel analysis, which allows us to investigate the importance of the final haircut size. Specifically, we find that the rating (spread) variation (increase) is larger for cases with deeper haircuts. Therefore, we find evidence that official and private defaults have different costs and then may induce selective defaults.

Suggested Citation

  • Silvia Marchesi & Tania Masi & Pietro Bomprezzi, 2024. "Is to Forgive to Forget? Sovereign Risk in the Aftermath of Private or Official Debt Restructurings," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(1), pages 292-334, March.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:1:d:10.1057_s41308-023-00198-8
    DOI: 10.1057/s41308-023-00198-8
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    More about this item

    Keywords

    Sovereign defaults; Haircut; Credit rating agencies; Bond yield spreads; Local projection;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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