Abstract
Sovereign debt restructurings can be implemented preemptively - prior to a payment default. We code a comprehensive new dataset and nd that preemptive restructurings (i) are frequent (38% of all deals 1978-2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the t with the data and explains the sovereign’s optimal choice: preemptive restructurings occur when default risk is high ex-ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions. (JEL: F34, F41, H63)
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