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Sovereign Debt Restructurings

Sovereign debt crises generally involve debt restructurings characterized by a mix of face-value haircuts and debt maturity extensions. The prevalence of maturity extensions has been hard to reconcile with economic theory. We develop a new quantitative model of endogenous sovereign debt restructuring that captures key stylized facts of sovereign debt and restructuring episodes. While debt dilution pushes in the direction of negative maturity extensions, three factors are quantitatively important in overcoming the effects of debt dilution and generating maturity extensions: (i) income recovery after default, (ii) credit exclusion after restructuring, and (iii) regulatory costs of book-value haircuts. Methodologically, we implement dynamic discrete choice solution methods that allow for smoother decision rules, rendering the problem tractable.

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https://doi.org/10.20955/wp.2018.013


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