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Sovereign Defaults: The Price of Haircuts

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  • Juan J. Cruces
  • Christoph Trebesch

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Abstract

A main puzzle in the sovereign debt literature is that defaults have only minor effects on subsequent borrowing costs and access to credit. This paper comes to a different conclusion. We construct the first complete database of investor losses (“haircuts”) in all restructurings with foreign banks and bondholders from 1970 until 2010, covering 180 cases in 68 countries. We then show that restructurings involving higher haircuts are associated with significantly higher subsequent bond yield spreads and longer periods of capital market exclusion. The results cast doubt on the widespread belief that credit markets “forgive and forget.”

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3604.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3604

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Related research

Keywords: sovereign debt crises; restructuring; reputation;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Greece debt restructuring: is it the worst of all time?
    by Simon Rogers in The Guardian Data Blog on 2012-03-09 10:15:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Ansgar Belke & Florian Verheyen, 2012. "Doomsday for the Euro Area: Causes, Variants and Consequences of Breakup," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 1(1), pages 1-15, July.
  2. Adam, Klaus & Grill, Michael, 2012. "Optimal Sovereign Default," CEPR Discussion Papers 9178, C.E.P.R. Discussion Papers.
  3. Joy, Mark, 2012. "Sovereign default and macroeconomic tipping points," Research Technical Papers 10/RT/12, Central Bank of Ireland.
  4. Porzecanski, Arturo C., 2012. "Buenos Aires to Athens: The Road to Perdition," MPRA Paper 37874, University Library of Munich, Germany.
  5. van Aarle, Bas & Kappler, Marcus, 2011. "Fiscal adjustment in Greece: In search for sustainable public finances," ZEW Discussion Papers 11-080, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises Explanations, Types, and Implications," IMF Working Papers 13/28, International Monetary Fund.
  7. Manasa Gopal & Markus Pasche, 2012. "Market-based Eurobonds Without Cross-Subsidisation," Global Financial Markets Working Paper Series 2012-37, Friedrich-Schiller-University Jena.
  8. Eden, Maya & Kraay, Aart & Qian, Rong, 2012. "Sovereign defaults and expropriations : empirical regularities," Policy Research Working Paper Series 6218, The World Bank.
  9. Daniel Cohen & Sébastien Villemot, 2012. "The sovereign default puzzle: Modelling issues and lessons for Europe," PSE Working Papers halshs-00692038, HAL.
  10. Ansgar Belke & Christian Dreger, 2011. "Ramifications of Debt Restructuring on the Euro Area: The Example of Large European Economies' Exposure to Greece," Discussion Papers of DIW Berlin 1141, DIW Berlin, German Institute for Economic Research.
  11. Markus Jorra, 2011. "The Heterogeneity of Default Costs: Evidence from Recent Sovereign Debt Crises," MAGKS Papers on Economics 201151, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  12. Jana Brandt & Markus Jorra, 2012. "Aid Withdrawal as Punishment for Defaulting Sovereigns? An Empirical Analysis," MAGKS Papers on Economics 201220, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  13. Porzecanski, Arturo C., 2012. "Behind the Greek default and restructuring of 2012," MPRA Paper 42432, University Library of Munich, Germany.
  14. Guido Sandleris, 2012. "The Costs of Sovereign Defaults:Theory and Empirical Evidence," Business School Working Papers 2012-02, Universidad Torcuato Di Tella.
  15. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950 - 2010: Literature Survey, Data, and Stylized Facts," IMF Working Papers 12/203, International Monetary Fund.

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