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Partial Default

Author

Listed:
  • Cristina Arellano
  • Xavier Mateos-Planas
  • José-Víctor Ríos-Rull

Abstract

We document that countries partially default often and with varying intensity, resulting in lengthy episodes and hump-shaped patterns for partial default and debt. Default episodes lead to haircuts for lenders but not to reductions in debt, because the defaulted debt accumulates and borrowing continues. We present a theory of partial default rationalizing these patterns and the heterogeneity of partial default, and partial default’s comovements with spreads, debt, and output that are absent in standard sovereign default theory. We include policy counterfactuals in the form of pari passu and no-dilution clauses and debt-relief policies, and their welfare implications.

Suggested Citation

  • Cristina Arellano & Xavier Mateos-Planas & José-Víctor Ríos-Rull, 2023. "Partial Default," Journal of Political Economy, University of Chicago Press, vol. 131(6), pages 1385-1439.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/722934
    DOI: 10.1086/722934
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