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Voluntary sovereign debt exchanges

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  • Hatchondo, Juan Carlos
  • Martinez, Leonardo
  • Sosa Padilla, César

Abstract

We show that some recent sovereign debt restructurings were characterized by (i) the absence of missed debt payments prior to the restructurings, (ii) reductions in the government's debt burden, and (iii) increases in the market value of debt claims for holders of the restructured debt. Since both the government and its creditors are likely to benefit from such restructurings, we label these episodes as “voluntary” debt exchanges. We present a model in which voluntary debt exchanges can occur in equilibrium when the debt level takes values above the one that maximizes the market value of debt claims. In contrast to previous studies on debt overhang, in our model opportunities for voluntary exchanges arise because a debt reduction implies a decline of the sovereign default risk. This is observed in the absence of any effect of debt reductions on future output levels. Although voluntary exchanges are Pareto improving at the time of the restructuring, we show that eliminating the possibility of conducting voluntary exchanges may improve welfare from an ex ante perspective. Thus, our results highlight a cost of initiatives that facilitate debt restructurings.

Suggested Citation

  • Hatchondo, Juan Carlos & Martinez, Leonardo & Sosa Padilla, César, 2014. "Voluntary sovereign debt exchanges," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 32-50.
  • Handle: RePEc:eee:moneco:v:61:y:2014:i:c:p:32-50
    DOI: 10.1016/j.jmoneco.2013.11.002
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    More about this item

    Keywords

    Sovereign default; Debt restructuring; Voluntary debt exchanges; Long-term debt; Endogenous borrowing constraints;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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