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Risk Management Optimization for Sovereign Debt Restructuring

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  • Consiglio Andrea

    (Department of Economics, Management and Statistics, University of Palermo, Palermo, Italy)

  • Zenios Stavros A.

    (University of Cyprus, Nicosia, Cyprus, Norwegian School of Economics, and Wharton Financial Institutions Center, University of Pennsylvania, USA)

Abstract

Debt restructuring is one of the policy tools available for resolving sovereign debt crises and, while unorthodox, it is not uncommon. We propose a scenario analysis for debt sustainability and integrate it with scenario optimization for risk management in restructuring sovereign debt. The scenario dynamics of debt-to-GDP ratio are used to define a tail risk measure, termed conditional Debt-at-Risk. A multi-period stochastic programming model minimizes the expected cost of debt financing subject to risk limits. It provides an operational model to handle significant aspects of debt restructuring: it collects all debt issues in a common framework, and can include contingent claims, multiple currencies and step-up or linked contractual features. Alternative debt profiles – obtained by maturity rescheduling, interest payment concessions or nominal value haircuts – are analyzed for their expected cost-risk tradeoffs. With a suitable re-calculation of the efficient frontier, the risk of debt un-sustainability of alternative risk profiles can be ascertained with a given confidence level. The model is applied to Greece sovereign debt crisis analyzing the suitability of various proposals to restore debt sustainability.

Suggested Citation

  • Consiglio Andrea & Zenios Stavros A., 2015. "Risk Management Optimization for Sovereign Debt Restructuring," Journal of Globalization and Development, De Gruyter, vol. 6(2), pages 181-213, December.
  • Handle: RePEc:bpj:globdv:v:6:y:2015:i:2:p:181-213:n:1
    DOI: 10.1515/jgd-2015-0015
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    Cited by:

    1. Giancarlo Corsetti & Aitor Erce & Timothy Uy, 2020. "Official sector lending during the euro area crisis," The Review of International Organizations, Springer, vol. 15(3), pages 667-705, July.
    2. Corsetti, G. & Erce, A. & Uy, T., 2017. "Official Sector Lending Strategies During the Euro Area Crisis," Cambridge Working Papers in Economics 1730, Faculty of Economics, University of Cambridge.
    3. Consiglio, Andrea & Zenios, Stavros A., 2015. "The Case for Contingent Convertible Debt for Sovereignst," Working Papers 15-13, University of Pennsylvania, Wharton School, Weiss Center.
    4. Andrea Consiglio & Michele Tumminello & Stavros A. Zenios, 2018. "Pricing Sovereign Contingent Convertible Debt," Journal of Enterprising Culture (JEC), World Scientific Publishing Co. Pte. Ltd., vol. 21(08), pages 1-36, December.
    5. Guzman Martin & Heymann Daniel, 2015. "The IMF Debt Sustainability Analysis: Issues and Problems," Journal of Globalization and Development, De Gruyter, vol. 6(2), pages 387-404, December.
    6. Martin Guzman & Domenico Lombardi, 2018. "Assessing the Appropriate Size of Relief in Sovereign Debt Restructuring," Documentos de trabajo del Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET) 2018-26, Universidad de Buenos Aires, Facultad de Ciencias Económicas, Instituto Interdisciplinario de Economía Política IIEP (UBA-CONICET).
    7. Consiglio Andrea & Zenios Stavros A., 2018. "Contingent Convertible Bonds for Sovereign Debt Risk Management," Journal of Globalization and Development, De Gruyter, vol. 9(1), pages 1-24, June.
    8. Cui, Wei, 2017. "Macroeconomic effects of delayed capital liquidation," LSE Research Online Documents on Economics 86156, London School of Economics and Political Science, LSE Library.
    9. Marialena Athanasopoulou & Andrea Consiglio & Aitor Erce & Angel Gavilan & Edmund Moshammer & Stavros A. Zenios, 2019. "Risk Management for Sovereign Debt Financing with Sustainability Conditions," Globalization Institute Working Papers 367, Federal Reserve Bank of Dallas.
    10. Ruicheng Yang & Li Li & Qi Jiang & Ji Qi, 2022. "Optimal bond issuance with cost and liquidity constraints for Chinese local governments: a multi-period stochastic programming approach," Empirical Economics, Springer, vol. 63(5), pages 2605-2632, November.
    11. Pablo A. Gluzmann & Martin M. Guzman & Joseph E. Stiglitz, 2018. "An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability," NBER Working Papers 25256, National Bureau of Economic Research, Inc.

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