Default Recovery Rates and Implied Default Probability Estimations: Evidence from the Argentinean Crisis
AbstractThis paper applies the model presented by J. Merrick Jr. (2001) to estimate both the default recovery rates and the im- plied default probabilities of the Argentinean Sovereign Bonds during the crisis which took place in December 2001. Between October 19th and December 24th 2001, the average bond price level reflected a downward trend, falling from USD 56.8 to USD 26.5 for each USD 100 face value. Similarly, default recovery rates descended from USD 38.7 to USD 20.8 whereas the base default probability registered an increase from 19.4% to 45.5%. Thus, bond price volatility could be explained in terms of these two em- bedded determinants. According to the model, bond prices were overvalued by USD 3.92 on average, which amounts to 12.9%; even when it is generally assumed that the default was foreseen by the market in December 2001. In accordance with private estimations of the Argentinean debt haircut which set it at 70% and the recovery rate estimated by the model which amounts to USD 21.7, Argentina would have overcome its default with a country risk premium of around 1960 basic points. Such a high country risk spread after debt restructuring would fully justify a deep haircut over the face value, the temporal term structure and interest rate coupons.
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Bibliographic InfoPaper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 05-10.
Length: 26 pages
Date of creation: 2005
Date of revision:
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- Fons, Jerome S, 1987. " The Default Premium and Corporate Bond Experience," Journal of Finance, American Finance Association, vol. 42(1), pages 81-97, March.
- Jochen R. Andritzky, 2004. "Implied Default Probabilities and Default Recovery Ratios: An Analysis of Argentine Eurobonds 2000-2002," Econometric Society 2004 Far Eastern Meetings 500, Econometric Society.
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