Sovereign Risk after Sovereign Restructuring. Private and Official Defaults

Abstract

This paper studies the relationship between sovereign debt default and sovereign credit risk by taking into account the depth of a debt restructuring and by distinguishing between commercial and official debt. We take different proxies for credit risk measures, such as rating agencies and institutional investors’ratings as well as bond yield spreads (EMBIG). By controlling for both the occurrence and the magnitude of debt defaults, we  nd that commercial and official defaults are associated to different outcomes. Private defaults seem to involve some reputational costs up to seven years since the last agreement, while official defaulters are not affected (or may even benefit) by the restructuring episodes. Using the Synthetic Control Method, we fi nd further evidence for the heterogeneity of the economic impact of debt restructurings, confi rming that official and private defaults may have different costs and then induce selective defaults.