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Take the Short Route: How to Repay and Restructure Sovereign Debt with Multiple Maturities

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  • Mark Aguiar
  • Manuel Amador

Abstract

We address the question of whether and how a sovereign should reduce its external indebtedness when default is a significant possibility, with a particular focus on whether a sovereign should buy back or dilute existing long-term sovereign bonds. Our main finding is that when reduction of debt is optimal, the sovereign should remain passive in the long-term bond market during the deleveraging process, retiring long-term bonds as they mature but never actively issuing or buying back these bonds. The only active margin is the short-term bond market, which involves partial roll over of such debt. Any active maturity management, as will typically be required to address rollover crisis risk, will be delayed until the end of the deleveraging process. We also show that there exist a set of Pareto improving debt restructurings in which maturities are shortened; however, these cannot be implemented by trading in competitive secondary markets.

Suggested Citation

  • Mark Aguiar & Manuel Amador, 2013. "Take the Short Route: How to Repay and Restructure Sovereign Debt with Multiple Maturities," NBER Working Papers 19717, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19717
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    References listed on IDEAS

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    1. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    2. Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 187-232.
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    8. Guido Lorenzoni & Iván Werning, 2019. "Slow Moving Debt Crises," American Economic Review, American Economic Association, vol. 109(9), pages 3229-3263, September.
    9. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2013. "Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises," NBER Working Papers 19516, National Bureau of Economic Research, Inc.
    10. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1105-1131.
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    Cited by:

    1. Christoph Trebesch & Jeromin Zettelmeyer, 2018. "ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(2), pages 287-332, June.
    2. Jeon, Kiyoung & Kabukcuoglu, Zeynep, 2018. "Income inequality and sovereign default," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 211-232.
    3. Javier Bianchi & Juan Carlos Hatchondo & Leonardo Martinez, 2018. "International Reserves and Rollover Risk," American Economic Review, American Economic Association, vol. 108(9), pages 2629-2670, September.
    4. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    5. Javier Bianchi & Jorge Mondragon, 2018. "Monetary Independence and Rollover Crises," NBER Working Papers 25340, National Bureau of Economic Research, Inc.
    6. Tamon Asonuma & Dirk Niepelt & Romain Ranciere, 2017. "Sovereign Bond Prices, Haircuts and Maturity," IMF Working Papers 2017/119, International Monetary Fund.
    7. Fernández, Raquel & Martin, Alberto, 2014. "The Long and the Short of It: Sovereign Debt Crises and Debt Maturity," CEPR Discussion Papers 10322, C.E.P.R. Discussion Papers.
    8. 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.
    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. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.
    11. Sánchez, Juan M. & Sapriza, Horacio & Yurdagul, Emircan, 2018. "Sovereign default and maturity choice," Journal of Monetary Economics, Elsevier, vol. 95(C), pages 72-85.
    12. Zhiguo He & Konstantin Milbradt, 2016. "Dynamic Debt Maturity," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2677-2736.
    13. Davide Debortoli & Ricardo Nunes & Pierre Yared, 2017. "Optimal Time-Consistent Government Debt Maturity," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 55-102.
    14. Corneli, Flavia & Tarantino, Emanuele, 2016. "Sovereign debt and reserves with liquidity and productivity crises," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 166-194.
    15. Carmen M. Reinhart & Christoph Trebesch, 2015. "Sovereign Debt Relief and its Aftermath," CESifo Working Paper Series 5422, CESifo.
    16. 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.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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