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Sovereign Debt Restructuring and Credit Recovery

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  • Violeta A. Gutkowski

Abstract

This paper focuses on the significant growth of domestic credit once the debt is restructured and shows that is not correlated with the size of the haircut. Second, it performs an event study around Ecuador’s sovereign default and restructuring of 2008-2009 to study changes in domestic bank lending behavior. After external debt restructuring, private lending increased the most for banks highly exposed to public debt. Finally, it provides a simple model were uncertainty about the return on government external debt during default has spillover effects on the domestic economy by creating dispersion in beliefs across domestic banks, which leads to a misallocation of credit. External debt restructuring eliminates domestic belief heterogeneity by making the return on bonds observable to everyone. This simple framing is not only consistent with the substantial growth in domestic credit upon debt restructuring but also with its independence from the haircut size observed in the data.

Suggested Citation

  • Violeta A. Gutkowski, 2024. "Sovereign Debt Restructuring and Credit Recovery," Working Papers 2024-015, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:98514
    DOI: 10.20955/wp.2024.015
    Note: Publisher DOI: https://doi.org/10.31389/eco.409
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    References listed on IDEAS

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    1. Guido Sandleris, 2016. "The Costs of Sovereign Default: Theory and Empirical Evidence," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-27.
    2. Guido Sandleris, 2016. "The Costs of Sovereign Default: Theory and Empirical Evidence," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 1-27.
    3. Lobo, Gerald J & Tung, Samuel S, 2000. "Financial Analysts' Earnings Forecast Dispersion and Intraday Stock Price Variability around Quarterly Earnings Announcements," Review of Quantitative Finance and Accounting, Springer, vol. 15(2), pages 137-151, September.
    4. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banks; beliefs; sovereign debt restructuring; uncertainty;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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