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Sovereign Cocos

Author

Listed:
  • Juan Carlos Hatchondo
  • Mr. Leonardo Martinez
  • Kursat Onder
  • Mr. Francisco Roch

Abstract

We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government faces liquidity shocks in the form of an increase of the bondholders' risk aversion. We find that in spite of reducing the frequency of defaults triggered by liquidity shocks, introducing cocos increases the overall default frequency. By mitigating concerns about liquidity, cocos make indebtedness and default risk more attractive for the government. In contrast, cocos that stipulate debt forgiveness when the government faces the shock, achieve larger welfare gains by reducing default risk.

Suggested Citation

  • Juan Carlos Hatchondo & Mr. Leonardo Martinez & Kursat Onder & Mr. Francisco Roch, 2022. "Sovereign Cocos," IMF Working Papers 2022/078, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/078
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    Other versions of this item:

    • Juan Carlos Hatchondo & Leonardo Martinez & Yasin Kürsat Önder & Francisco Roch, 2022. "Sovereign Cocos," Working Papers 139, Red Nacional de Investigadores en Economía (RedNIE).

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    Cited by:

    1. Maximiliano Dvorkin & Emircan Yurdagul & Horacio Sapriza & Juan Sanchez, 2018. "Sovereign Debt Restructuring: A Dynamic Discrete Choice Approach," 2018 Meeting Papers 1273, Society for Economic Dynamics.
    2. Maximiliano Dvorkin & Juan M. Sánchez & Horacio Sapriza & Emircan Yurdagul, 2021. "Sovereign Debt Restructurings," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 26-77, April.

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