Sovereign Debt Default Research Articles

IS SOVEREIGN DEBT RESISTANCE OVERCOMING A PREMISE OF SOVEREIGN DEFAULT PATH DEPENDENCE OCCURENCE?

The main aim of the article is to analyze the interconnection between sovereign debt resilience and sovereign default path dependence with its application for Ukrainian economy. There were system dynamics methods used in this research with the simulation using Polya process probability (Polya urn). We used the statistical data base of the Ukrainian economy and fundamental works in system dynamics and sovereign debt analysis. We examine in the article the problem of overcoming existing sovereign debt mental model resilience to external and internal shocks in a situation of uncertainty and the issue of the appropriate instruments for sovereign debt resilience conceptual analysis application. The causal loops diagrams are used to demonstrate the main effects arising under the policy dilemma conducting of sovereign debt default or its repayment. Among the main consequences of not overcoming the existing mental model is 1) the obsolete sovereign debt management financial structure of the society management method (The Deming cycle is used according to the scheme: "Plan - work - check - activity", or "Plan - execution - check - adjustment" to explain the existing principle of sovereign debt service.) 2) foreign direct investment decreasing versus external debt decreasing, which slows down the process of economic development 3) The disproportion between national savings and investment 4) The absence of the resistance in sovereign debt policy mechanism. The author highlights, that under Pola process the system does not lock in to possible balance - we are not observing the uniform distribution of the proportion of sovereign defaults. Positive feedback loops are overlapped by undetermined negative one. Polya process in a case of the sovereign default versus debt repayment with the appropriate density function for sovereign default probability after 29 years (trials) has been used to demonstrate the nonlinearity processes of the appropriate policy choice. The main conclusion is that the equilibrium distribution of the Polya process is not quite uniform. We are observing a locally unstable disequilibrium with the positive feedback but impossibility to lock in in a certain point.

Life After Default. Private and Official Deals

This paper studies the relationship between sovereign debt default and annual GDP growth distinguishing between private and official deals. Using the Synthetic Control Method to analyze 23 official and private defaulters from 1970 to 2017, we find that private defaults generate output losses both during the crisis and persisting over time. Conversely, official defaulters do not show a permanent drop in GDP per capita, neither during the crisis nor in its aftermath. Using panel data analysis to control for the creditors' loss (haircut), we confirm that official and private defaults may have different effects on GDP growth.

Sovereign Debt Default and Restoration Literature: Dryden's Exclusion Crisis Poems, Goldsmiths, and the Stop of the Exchequer of 1672

Sovereign Debt Default and Restoration Literature: Dryden's Exclusion Crisis Poems, Goldsmiths, and the Stop of the Exchequer of 1672

An Apocalypse Foretold: Climate Shocks and Sovereign Defaults

Climate change poses an existential threat to the global economy. While there is a growing body of literature on the economic consequences of climate change, research on the link between climate change and sovereign default risk is nonexistent. We aim to fill this gap in the literature by estimating the impact of climate change vulnerability and resilience on the probability of sovereign debt default. Using a sample of 116 countries over the period 1995-2017, we find that climate change vulnerability and resilience have significant effects on the probability of sovereign debt default, especially among low-income countries. That is, countries with greater vulnerability to climate change face a higher likelihood of debt default compared to more climate resilient countries. These findings remain robust to a battery of sensitivity checks, including alternative measures of sovereign debt default, model specifications, and estimation methodologies.

The Sovereignty of Finance? Distress and the Financialization of Sovereign Debt

Abstract This article argues that the relationship between finance and state sovereignty is neither automatic nor understandable in some generalized manner. To develop this argument, I pay particular attention to the financialization of distressed sovereign debt, especially sovereign debt defaults in the Global South with particular reference to Argentina’s default in 2001 and the string of legal cases it triggered. These legal processes breathed a strange after-life into Argentina’s defaulted debt by converting that debt into fully commodified financial contracts. I argue that the financialization of sovereign debt is enabled by a long and complex evolution in the application of the doctrine of restrictive sovereign immunity. This financialization, moreover, is indicative of ways in which forms of financial distress are reworked as renewed sources of financial value. This provokes questions about the very relationship between waste and value in our global political economy.

Sovereign Risk after Sovereign Restructuring. Private and Official Defaults

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.

Labor market distortions under sovereign debt default crises

Risk of sovereign debt default has frequently affected both emerging market and developed economies. Such financial crises are often followed by severe declines of employment that are hard to justify using standard economic models. This paper documents that labor market distortions deteriorate substantially around debt default episodes. Two different explanations for such dynamics are evaluated by linking these distortions to changes in labor taxes and costs of financing working capital. When added into a dynamic model of equilibrium default, these features are able to replicate the behavior of the observed labor distortion around a period of financial crisis and can also account for substantial declines of employment. In the model, higher interest rates are propagated into larger costs of hiring labor through the presence of working capital. Then, as an economy is hit with a stream of bad productivity shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm demand for labor and generates a labor wedge. A similar effect is obtained with an endogenously generated counter-cyclical income tax rate policy that also rationalizes why austerity is applied during deep recessions. The model is used to shed light on the recent events of the Euro Area debt crisis, in particular, the Greek sovereign debt default.

Courts as Information Intermediaries: A Case Study of Sovereign Debt Disputes

When foreign sovereigns default on their debt, creditors sometimes sue them. These creditors are sophisticated actors, and they sue even though courts can do little to force a sovereign to satisfy a judgment. Why do they sue? This Article argues that courts serve as information intermediaries that strengthen reputational enforcement in the international sovereign debt market. It shows, through a case study of sovereign debt defaults and disputes, three ways in which courts play this role. First, in hard cases, courts clarify reputational signals by publicly determining whether breach occurred. Second, through discovery and fact finding, they mitigate information asymmetries concerning aspects of sovereign behavior during default that are difficult to monitor. Third, they provide a forum for shaping the norms by which behavior is judged. The sovereign debt market thus relies on a hybrid of legal and nonlegal enforcement. Parties appeal to the law to determine rights and detect bad behavior. At the same time, they depend on reputation to discourage violations. Contracts scholars debate the extent to which nonlegal mechanisms such as reputation can support trade. Recognizing that courts can function as information intermediaries implies that courts can expand the range of markets that reputation can support. Under certain conditions, courts can supplement legal remedies by transmitting accurate and credible information about market participants’ expectations and behavior.

Take the Short Route: Equilibrium Default and Debt Maturity

We study the interactions between sovereign debt default and maturity choice in a setting with limited commitment for repayment as well as future debt issuances. Our main finding is that, under a wide range of conditions, the sovereign should, as long as default is not preferable, remain passive in long‐term bond markets, making payments and retiring long‐term bonds as they mature but never actively issuing or buying back such bonds. The only active debt‐management margin is the short‐term bond market. We show that any attempt to manipulate the existing maturity profile of outstanding long‐term bonds generates losses, as bond prices move against the sovereign. Our results hold regardless of the shape of the yield curve. The yield curve captures the average costs of financing at different maturities but is misleading regarding the marginal costs.

Examining the influence of moral suasion on sovereign debt default risk

In this paper, we verify whether moral suasion will reduce sovereign debt default risk. We specify the effect of portfolio home bias toward domestic assets on sovereign debt default by using the dynamic panel data model, which can be used to control for common global factors and country factors with fundamentals. In contrast to other studies, we use the Merton model (contingent claims analysis) to calculate the sovereign default risk because this constructed-indicator can reflect variations in credit risk and the market value of the balance sheet of a country. Our empirical results point out that periphery countries (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) indeed reduce sovereign debt default risk via portfolio home bias toward domestic equity and bonds. Core countries tend to reduce sovereign debt default risk via home sovereign bond holdings. However, in the aftermath of sovereign debt default, moral suasion will increase sovereign debt default risk in periphery countries.

Income inequality and sovereign default

In this paper, we study how income inequality matters for government borrowing and default decisions. We extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income. We calibrate the model to match a number of stylized facts for Argentina. We show that (i) rising income inequality within a country increases the probability of default significantly; (ii) the effect of output shocks is larger than the effect of inequality shocks; (iii) the joint effect of these two shocks can generate a high default probability consistent with the Argentine data; (iv) the model can match the high volatility of consumption by the poor relative to the rich; and (v) more progressive income taxes lead to lower default risk.

Sovereign Bond Disputes Caseload: Basis for Legal Strategies in International Investment Law Arbitration

This article is part of the master thesis “Dispute Settlement after Sovereign Debt Defaults: A Forum Menu for Holdout Creditors”. The article analyses issues that holdout creditors should take into account when initiating arbitral proceedings before an international investment tribunal, particularly under the International Centre for Settlement of Investment Disputes rules. The article also analyses aspects of financial law, mainly by examining hypothetical situations where treaty shopping can be executed through International Central Securities Depositories such as Euroclear and Clearstream. The article provides an objective analysis of the main pros and cons of resolving sovereign debt disputes before investment tribunals. Finally, the article demonstrates that bondholders who have acquired their bonds in the secondary market should not go before ICSID looking for full enforcement of sovereign bonds’ terms, as the compensation awarded might be considerably limited, having regard only to the bonds’ market value.

Prioritizing Solutions of Sovereign Debt Default in PIIGS

The global economic recession in 2008 triggered an eruption of Europe sovereign debt defaults in Portugal, Italy, Ireland, Greece, and Spain (PIIGS), and these defaults originated from a social welfare expense burden and sovereign debt rollover. In this paper, we detect methods for eliminating the European sovereign debt crisis via the Delphi technique and the Analytic Hierarchy Process. Suggestions from experts include, respectively, “actively lessening government fiscal deficit,” ”lowering the sovereign debt of PIIGS,” and “strengthening the fiscal structure of Eurozone countries.” The empirical results correspond with the actual actions of the EMU, especially the reimbursement constraints on PIIGS by the European Central Bank. It is concluded that improving the nation’s fiscal structure is important, and the feasible ways to do so include reducing social welfare expense, levying more taxes on the middle class, and improving the quality of labor. Especially, enhancing a nation’s debt-credit ratio could increase solvency.

Filling the Gap in Historical Statistics: Macroeconomic Indicators of the Debt Burden of the Kingdom of Yugoslavia during Great Depression

The subject matter of this paper are specific causes of sovereign debt default of the Kingdom of Yugoslavia in 1932. In the first part of the paper, time series of public debt, with the subcategories of domestic and foreign public debt, for the period from 1929 to 1939, were constructed on the basis of data from Statistical Yearbooks of the Kingdom of Yugoslavia and the League of Nations. In the second part of the paper, the sustainability of public debt of the Kingdom of Yugoslavia has been measured with help of relevant macroeconomic indicators: public debt-to-GDP ratio and debt service-to-public revenue ratio. In the third part of the paper, decomposition of public debt data has been made with respect to the methodology used in Statistical Yearbook of the Kingdom of Yugoslavia. This decomposition has shown that public debt accumulation had to do little if anything with the Great Depression and was to a large extent caused by political, economic and financial consequences of the Great War.

Sovereign Default Risk, Fiscal Adjustment, and Debt Renegotiation

This paper studies the effects of government capital accumulation on sovereign debt default risk and debt restructuring renegotiation outcomes when government has limited ability to extract revenues from households. We develop a quantitative dynamic stochastic general equilibrium model of sovereign default, debt renegotiation, and fiscal policies, where government chooses between the fiscal instruments of government consumption and government investment. Government capital provides an additional means of adjustment in the face of a bad productivity shock. It also affects government's incentive to re-access the international credit market when a country chooses to default. We implement fiscal policies and rules that restrict foreign debt, especially focusing on how fiscal rules affect government spending dynamics. The model delivers three key predictions. (1) A higher level of government capital implies less risky sovereign debt and higher recovery rates when the government chooses to default. (2) A high debt to output ratio is possible with a sufficient level of government capital. (3) Fiscal adjustment that reduces public investment may be self-defeating.

Flooded with debt

This study explores if natural disasters are able to trigger a sovereign debt default. Natural disasters make the debt of a country less sustainable as they worsen the public finances of a country. The main findings from our empirical analysis clearly indicate that large-scale natural disasters increase significantly the onset probability of a sovereign debt default by about three percentage-points. It turns out that particularly major earthquakes and storms raise the likelihood of a default as they create the most widespread damage reported worldwide. This will limit the debt servicing opportunities of a country in the future.

Life After Default: Private vs. Official Sovereign Debt Restructurings

This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and official sovereign debt restructurings. Analyzing 73 default episodes in 117 countries over the period 1975-2013, I find that defaults are correlated with contraction of short-term output growth. Most importantly, controlling for the severity of the default, I am able to detect a more lasting and negative link between default and growth. While higher private haircuts imply a negative stigma which is associated to lower growth over a longer period, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run. Adopting an alternative specification, in which the dependent variable is a country's credit rating, I find very similar results for private haircuts and official restructurings. They are both associated to lower ratings up to seven years after the default. To the extent that credit ratings is a good proxy for borrowing costs, positive growth prospects for official defaulters seem not to be influenced by a lower reputation in the credit markets.

Life after Default? Private vs. Official Sovereign Debt Restructurings

This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between private and official deals, as well as between debt flow and stock reduction. Analyzing 520 restructuring episodes, over the period 1975-2013, we find that private and official defaults may have different growth outcomes. Most importantly, controlling for the severity of the debt crisis, we are able to detect a more lasting and negative relationship between default and growth. While private defaults are generally associated with lower growth during the crisis and over the long run (mitigated by the amount involved), for official defaulters we do not observe a growth contraction throughout the years of the crisis and they are associated with higher growth over the long run (independently of the amount involved). When debt relief operations involve debt write offs, however, the negative relationship between private default and growth becomes blurred, while official defaulters strongly benefit in terms of growth from the face value reduction. Using the Synthetic Control Method, we present further evidence for the heterogeneity of the economic impact of debt restructurings, confirming that official and private defaults may have different effects on GDP growth and should then be treated differently.

THE ECONOMIC IMPACT OF SOVEREIGN DEFAULTS IN LATIN AMERICA 1870-2012

ABSTRACTThis article analyzes sovereign debt defaults in four Latin American countries—Argentina, Brazil, Chile and Mexico—for the period 1870-2012. The impact of sovereign defaults on real GDP growth is generally short-lived, while the impact in terms of output losses is deep and lasts long. Defaults in the period 1972-2012 show a deep and long-lasting impact compared to defaults in earlier periods. Moreover, the length of the contraction that follows a default is associated with favourable international conditions in the run-up to a default, while the depth of the contraction is associated with an expansive domestic economy in the run-up to a default. The results fit with boom–bust theories and sudden stop models.

A study of regional trends in external debt in developing economies

This study examines the trends in external debt in developing countries across different regions. The variables considered were gross external debt, public and public guaranteed external debt, short-term external debt, and variable rate external debt. The data were collected from the joint BIS-IMF-OECD-World Bank statistics on external debt, pertaining to the period 1995-2014. The results of the study highlight significant regional imbalances in external debt, which may contribute to the risk of sovereign-debt default. East Asia & Pacific region had high level of gross external debt and high percentage of short-term external debt. Europe & Central Asia region had high level of gross external debt, high gross external debt growth rate, high percentage of variable rate external debt, high ratio of short-term external debt relative to GDP, and high ratio of variable rate external debt relative to GDP; perhaps reflecting the ongoing European Sovereign Debt Crisis. Latin America & Caribbean region had high level of gross external debt and high percentage of variable rate external debt. Middle East & North Africa region had high percentage of public and public guaranteed external debt. South Asia had high gross external debt growth rate, high public and public guaranteed external debt growth rate, high short-term external debt growth rate, and high variable rate external debt growth rate in the post-crisis period. Sub-Saharan Africa region had high percentage of public and public guaranteed external debt and high variable rate external debt growth rate in the post-crisis period. Thus, each of the regions had specific types of risk. The individual developing economies in the regions need to be examined carefully to isolate their contribution to regional sovereign-debt default risk