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Risk Profiles for Re-profiling the Sovereign Debt of Crisis Countries

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  • Consiglio, Andrea

    (University of Palermo)

  • Zenios, Stavros A.

    (University of Cyprus and University of PA)

Abstract

This paper uses a risk-management approach to re-profiling the sovereign debt of countries facing debt crises. Using scenario analysis we develop a risk measure of the sovereign's debt--Conditional Debt-at-Risk--and an optimization model is used to trace risk profiles that tradeoff expected cost of debt financing against the Conditional Debt-at-Risk. The risk profiles are particularly informative for crisis countries, as they allow us to identify, with high-probability, debt unsustainability. We develop risk profiles for two Eurozone countries with excessive debt, Cyprus and Italy, both in their current form and under various forms of restructuring or rescheduling, and show how to assess debt sustainability. We also develop the risk profiles for a proposal to impose "debt sanctions" in the Ukrainian crisis and show that the (financial) impact could be substantial.

Suggested Citation

  • Consiglio, Andrea & Zenios, Stavros A., 2014. "Risk Profiles for Re-profiling the Sovereign Debt of Crisis Countries," Working Papers 14-14, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:14-14
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    File URL: http://fic.wharton.upenn.edu/fic/papers/14/p1414.html
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    Cited by:

    1. 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.

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