Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors

Abstract

Foreign creditors’ business cycles influence both the process and outcome of sovereign debt restructurings. We compile two new datasets on creditor committees and on creditors’ business cycles during debt restructurings and find that when creditors experience high GDP growth, restructurings are protracted and settled with smaller haircuts. To explain these stylized facts, we develop a theoretical model of sovereign debt that embeds multiround negotiations between a risk-averse debtor and a risk-averse creditor. The quantitative analysis shows that high creditor income results in both longer delays in restructurings and smaller haircuts. Our theoretical findings are also confirmed through an empirical analysis.