Optimal public debt composition during debt crises: A review of theoretical literature

Abstract

AbstractThis study surveys the theoretical literature on the optimal public debt composition during sovereign debt crises. This survey is particularly relevant because sovereign debt crises have been recurrent manifestations over the past few decades, and there is growing evidence on the critical role of the composition of public debt portfolios during such events. Public debt composition refers to the characteristics of public debt portfolios, such as debt maturity, currency composition, and types of creditors. This survey adopts a broad definition of sovereign debt crisis, encompassing a post‐default phase when the crisis‐ridden country enters debt renegotiations and restructuring, and a pre‐default phase in which debtor countries either take a large non‐concessional loan from the International Monetary Fund (IMF) to avoid debt default and restructuring or experience critically high bond spreads and default risk. This survey collects the dispersed literature on the theoretically optimal public debt composition choices from a sovereign borrower's perspective during both phases of the sovereign debt crisis. The surveyed theoretical literature reveals several trade‐offs underlying the sovereign's public debt composition choices during debt crises.