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Delay and Haircuts in Sovereign Debt: Recovery and Sustainability

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  • Ghosal, Sayantan
  • Miller, Marcus
  • Thampanishvong, Kannika

Abstract

One of the striking aspects of recent sovereign debt restructurings is, conditional on default, delay length is positively correlated with the size of "haircut", which is size of creditor losses. In this paper, we develop an incomplete information model of debt restructuring where the prospect of uncertain economic recovery and the signalling about sustainability concerns together generate multi-period delay. The results from our analysis show that there is a correlation between delay length and size of haircut. Such results are supported by evidence. We show that Pareto ranking of equilibria, conditional on default, can be altered once we take into account the ex ante incentive of sovereign debtor. We use our results to evaluate proposals advocated to ensure orderly resolution of sovereign debt crises.

Suggested Citation

  • Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers 2010-17, Scottish Institute for Research in Economics (SIRE).
    • Handle: RePEc:edn:sirdps:650
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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    2. Ghosal, Sayantan & Thampanishvong, Kannika, 2013. "Does strengthening Collective Action Clauses (CACs) help?," Journal of International Economics, Elsevier, vol. 89(1), pages 68-78.
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    10. Amrita Dhillon & Javier García‐Fronti & Sayantan Ghosal & Marcus Miller, 2006. "Debt Restructuring and Economic Recovery: Analysing the Argentine Swap," The World Economy, Wiley Blackwell, vol. 29(4), pages 377-398, April.
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    Cited by:

    1. Merlo, Antonio & Tang, Xun, 2019. "New results on the identification of stochastic bargaining models," Journal of Econometrics, Elsevier, vol. 209(1), pages 79-93.
    2. Antonio Merlo & Xun Tang, 2010. "Identification and Estimation of Stochastic Bargaining Models, Third Version," PIER Working Paper Archive 11-008, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 11 Mar 2011.
    3. Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.
    4. Ishikawa Tomoko, 2014. "Collective Action Clauses in Sovereign Bond Contracts and Investment Treaty Arbitration – An Approach to Reconcile the Irreconcilable," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 4(2), pages 1-36, July.
    5. Antonio Merlo & Xun Tang, 2011. "Identification and Estimation of Stochastic Bargaining Models, Fourth Version," PIER Working Paper Archive 11-035, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 19 Oct 2011.

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    More about this item

    Keywords

    Welfare; Endogenous Price Flexibility; Optimal Monetary Policy;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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