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The Stock of External Sovereign Debt: Can We Take the Data At ‘Face Value’?

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  • Daniel A. Dias
  • Christine J. Richmond
  • Mark L.J. Wright

Abstract

The stock of sovereign debt is typically measured at face value. This is a misleading indicator when debts are issued with different contractual forms. In this paper we construct a new measure of the stock of external sovereign debt for 100 developing countries from 1979 to 2006 that is invariant to contractual form, and illustrate five problems with debt stocks measured at face value. First, we show that correcting for differences in the contractual form of debt paints a very different quantitative, and in some cases also qualitative, picture of the stock of developing country external sovereign debt. Second, rankings of indebtedness across countries, which were historically used to define eligibility for debt forgiveness, are sometimes inverted once we correct for differences in contractual form. Third, the empirical performance of the benchmark quantitative model of sovereign debt deteriorates by between 40 to 70 percent once model-consistent measures of debt are used. Fourth, we show how the spread of aggregation clauses in debt contracts which award creditors voting power in proportion to the contractual face value may introduce inefficiencies into the process of restructuring sovereign debts. Fifth, we show how the use of contractual face values gives issuing countries the ability to manipulate their debt stock data, and illustrate the use of these techniques in practice.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17551.

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Date of creation: Oct 2011
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Handle: RePEc:nbr:nberwo:17551

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References

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  1. Satyajit Chatterjee & Burcu Eyigungor, 2011. "Maturity, indebtedness, and default risk," Working Papers 11-33, Federal Reserve Bank of Philadelphia.
  2. Ananth Ramanarayanan & Cristina Arellano, 2008. "Default and the Maturity Structure in Sovereign Bonds," 2008 Meeting Papers 479, Society for Economic Dynamics.
  3. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
  4. William Easterly, 1999. "When is fiscal adjustment an illusion?," Economic Policy, CEPR & CES & MSH, vol. 14(28), pages 55-86, 04.
  5. Michael Tomz & Mark L. J. Wright, 2007. "Do countries default in “bad times”?," Working Paper Series 2007-17, Federal Reserve Bank of San Francisco.
  6. Herschel I. Grossman & John B. Van Huyck, 1985. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," NBER Working Papers 1673, National Bureau of Economic Research, Inc.
  7. Alfaro, Laura & Kanczuk, Fabio, 2005. "Sovereign debt as a contingent claim: a quantitative approach," Journal of International Economics, Elsevier, vol. 65(2), pages 297-314, March.
  8. Jeromin Zettelmeyer & Christoph Trebesch & Mitu Gulati, 2013. "The Greek Debt Restructuring: An Autopsy," Working Paper Series WP13-8, Peterson Institute for International Economics.
  9. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
  10. Ran Bi, 2008. "Beneficial Delays in Debt Restructuring Negotiations," IMF Working Papers 08/38, International Monetary Fund.
  11. Guido Sandleris & Horacio Sapriza & Filippo Taddei, 2009. "Indexed Sovereign Debt: An Applied Framework," Business School Working Papers 2009-01, Universidad Torcuato Di Tella.
  12. Mark Aguiar & Gita Gopinath, 2004. "Defaultable debt, interest rates, and the current account," Working Papers 04-5, Federal Reserve Bank of Boston.
  13. Mark Wright & Christine Richmond & Daniel Dias, 2013. "In for a Penny, In for a 100 Billion Pounds: Quantifying the Welfare Benefits from Debt Relief," 2013 Meeting Papers 646, Society for Economic Dynamics.
  14. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "The Forgotten History of Domestic Debt," NBER Working Papers 13946, National Bureau of Economic Research, Inc.
  15. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
  16. Jaejoon Woo & Manmohan S. Kumar, 2010. "Public Debt and Growth," IMF Working Papers 10/174, International Monetary Fund.
  17. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  18. Mark Wright & Christine Richmond & Daniel Dias, 2012. "On The Stock of External Sovereign Debt," 2012 Meeting Papers 490, Society for Economic Dynamics.
  19. Juan Carlos Hatchondo & Leonardo Martinez, 2009. "Long-duration bonds and sovereign defaults," Working Paper 08-02, Federal Reserve Bank of Richmond.
  20. Piga, Gustavo, 2001. "Do Governments Use Financial Derivatives Appropriately? Evidence from Sovereign Borrowers in Developed Economies," International Finance, Wiley Blackwell, vol. 4(2), pages 189-219, Summer.
  21. Ran Bi, 2008. ""Beneficial" Delays in Debt Restructuring Negotiations," 2008 Meeting Papers 766, Society for Economic Dynamics.
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Citations

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Cited by:
  1. Michael Tomz & Mark L. J. Wright, 2013. "Empirical Research on Sovereign Debt and Default," NBER Working Papers 18855, National Bureau of Economic Research, Inc.
  2. Mark Aguiar & Manuel Amador, 2013. "Sovereign Debt: A Review," NBER Working Papers 19388, National Bureau of Economic Research, Inc.
  3. Douglas Sutherland & Peter Hoeller, 2012. "Debt and Macroeconomic Stability: An Overview of the Literature and Some Empirics," OECD Economics Department Working Papers 1006, OECD Publishing.
  4. Kim Oosterlinck, 2013. "Sovereign debt defaults: insights from history," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 697-714, WINTER.
  5. Rohan Pitchford & Mark L. J. Wright, 2013. "On the contribution of game theory to the study of sovereign debt and default," Oxford Review of Economic Policy, Oxford University Press, vol. 29(4), pages 649-667, WINTER.
  6. Mark Wright & Christine Richmond & Daniel Dias, 2013. "In for a Penny, In for a 100 Billion Pounds: Quantifying the Welfare Benefits from Debt Relief," 2013 Meeting Papers 646, Society for Economic Dynamics.

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