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Orderly sovereign debt restructuring : missing in action !

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  • Canuto, Otaviano
  • Pinto, Brian
  • Prasad, Mona
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    Abstract

    This paper takes a hard look at the experience with official intervention in sovereign debt crises, focusing on debt crises of the 1980s, Russia in 1998, Argentina in 2001, and Greece in 2010. Based on the track record, the authors argue that in situations where countries face a solvency problem, official intervention is more likely to succeed if official money is lent at the risk-free rate reflecting its seniority and private creditors receive an upfront haircut. Such an approach would limit the costs associated with procrastination and increase the chances of success by enabling a more realistic fiscal program to restore solvency. They examine the moral hazard implications for debtor countries of this proposal and find that these are unlikely to be severe. In fact, after their crises of 1997-2001, emerging market countries embarked on an aggressive and comprehensive program of self-insurance, indicating that they are weary of debt crises and their costs. However, the prospect of an upfront haircut for private creditors in the event of insolvency is likely to make them more diligent in their sovereign lending decisions.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6054.

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    Date of creation: 01 May 2012
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    Handle: RePEc:wbk:wbrwps:6054

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    Keywords: Debt Markets; Bankruptcy and Resolution of Financial Distress; External Debt; Emerging Markets; Access to Finance;

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    1. Weinschelbaum, Federico & Wynne, Jose, 2005. "Renegotiation, collective action clauses and sovereign debt markets," Journal of International Economics, Elsevier, vol. 67(1), pages 47-72, September.
    2. Claessens, Stijn & Oks, Danel & van Wijnbergen, Sweder, 1994. "Interest Rates, Growth and External Debt: The Macroeconomic Impact of Mexico's Brady Deal," CEPR Discussion Papers 904, C.E.P.R. Discussion Papers.
    3. Augusto de la Torre & Eduardo Levy Yeyati & Sergio L. Schmukler, 2003. "Living and Dying with Hard Pegs: The Rise and Fall of Argentina's Currency Board," Journal of LACEA Economia, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    4. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
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