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Voluntary Sovereign Debt Exchanges

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Listed:
  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Cesar Sosa Padilla

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 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

  • Juan Carlos Hatchondo & Leonardo Martinez & Cesar Sosa Padilla, 2013. "Voluntary Sovereign Debt Exchanges," Department of Economics Working Papers 2013-13, McMaster University.
  • Handle: RePEc:mcm:deptwp:2013-13
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2013-13.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Velde, Francois R., 2016. "What We Learn from a Sovereign Debt Restructuring in France in 1721," Economic Perspectives, Federal Reserve Bank of Chicago, issue 5, pages 1-17.
    2. repec:eee:dyncon:v:87:y:2018:i:c:p:124-151 is not listed on IDEAS
    3. Farhi, Emmanuel & Tirole, Jean, 2015. "Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops," CEPR Discussion Papers 11024, C.E.P.R. Discussion Papers.
    4. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    5. Carmen M. Reinhart & Christoph Trebesch, 2014. "A Distant Mirror of Debt, Default, and Relief," NBER Working Papers 20577, National Bureau of Economic Research, Inc.
    6. Tamon Asonuma & Christoph Trebesch, 2016. "Sovereign Debt Restructurings: Preemptive Or Post-Default," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 175-214, February.
    7. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
    8. repec:eee:macchp:v2-1697 is not listed on IDEAS
    9. Hatchondo, Juan Carlos & Martinez, Leonardo & Onder, Yasin Kursat, 2017. "Non-defaultable debt and sovereign risk," Journal of International Economics, Elsevier, vol. 105(C), pages 217-229.
    10. Leonardo Martinez & Juan Hatchondo, 2017. "Sovereign Cocos and the Reprofiling of Debt Payments," 2017 Meeting Papers 1435, Society for Economic Dynamics.
    11. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    12. repec:eee:inecon:v:111:y:2018:i:c:p:190-213 is not listed on IDEAS
    13. Aguiar, M. & Chatterjee, S. & Cole, H. & Stangebye, Z., 2016. "Quantitative Models of Sovereign Debt Crises," Handbook of Macroeconomics, Elsevier.
    14. repec:eee:moneco:v:90:y:2017:i:c:p:50-63 is not listed on IDEAS
    15. Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief And Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251, February.
    16. repec:eee:jimfin:v:81:y:2018:i:c:p:221-241 is not listed on IDEAS
    17. Juliana Salomao, 2015. "Sovereign Debt Renegotiation and Credit Default Swaps," 2015 Meeting Papers 826, Society for Economic Dynamics.

    More about this item

    Keywords

    Sovereign Default; Debt Restructuring; Voluntary Debt Exchanges; Long-term Debt; Endogenous Borrowing Constraints.;

    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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