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1. Sovereign Haircuts: 200 Years of Creditor Losses

Author:
Clemens M. Graf von Luckner, Josefin Meyer, Carmen M. Reinhart, and Christoph Trebesch
Publication Date:
06-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
We study sovereign external debt crises over the past 200 years, with a focus on creditor losses, or "haircuts". Our sample covers 327 sovereign debt restructurings with external private creditors over 205 default spells since 1815. Creditor losses vary widely (from none to 100%), but the statistical distribution has remained remarkably stable over two centuries, with an average haircut of around 45 percent. The data also reveal that “serial restructurings”, meaning two or more debt exchanges in the same default spell, are on the rise. To account for this trend toward serial renegotiation, we introduce the “Bulow-Rogoff haircut” – a cumulative measure that captures the combined creditor loss across all restructurings during a single debt crisis. Using this measure, we show that longer debt crises deliver larger haircuts and that interim restructurings provide limited debt relief. We further examine past predictors of the size of haircuts and identify “rules of thumb” applicable to future defaults. Poorer countries, first-time debt issuers, and those that borrowed heavily from external creditors all record significantly higher haircuts in case of a default. Geopolitical shocks – such as wars, revolutions, or the break-up of empires – deliver the deepest haircuts. Sovereign debt investment disasters are often linked to (geo-)political disasters.
Topic:
Monetary Policy, Financial Crisis, Geopolitics, Credit, Sovereign Debt, Emerging Economies, Debt Restructuring, and Sovereign Default
Political Geography:
Global Focus

2. External Debt Stress and Domestic Debt Restructuring: Resolving a Paradox

Author:
C. P. Chandrasekhar
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The ongoing sovereign debt crisis in low- and middle-income countries (LMICs) was signalled by instances of default or failure to meet external debt obligations denominated in hard currencies. But the response to the crisis has included attempts to restructure domestic sovereign debt issued largely in domestic currencies. Such moves have been justified by identifying the crisis as one of excessive aggregate public debt rather than just unsustainable levels of external debt. There is a need, it is argued, to reduce the gross financing needs (foreign and domestic) of debt-stressed governments that have accumulated excessively high levels of aggregate—domestic and foreign currency—public debt. This assertion ignores the difference between the stress associated with servicing debt in domestic and foreign currency. Governments can mobilise domestic resources using their sovereign right to tax and central banks have control over domestic currency supply, whereas both have little control over foreign currency availability, which depends on net foreign revenues earned and on net inflows of foreign incomes, transfers and capital. While domestic debt restructuring releases domestic resources, it does not automatically yield the foreign currency needed to relieve external debt stress. In addition, since the holders of domestic sovereign debt include citizens deploying their savings to invest in pension funds, insurance products and mutual funds, and commercial banks parking resources in ‘safe investments’, restructuring that debt through explicit or implicit haircuts is bound to be economically destabilising. Past savings would be eroded with adverse impact on current demand, and the damage to the balance sheets of banks would restrain credit to the detriment of consumption and investment. This makes implementation of domestic debt restructuring costly and difficult, as experience illustrates. Given that context, the paper examines the possible reasons why when less developed countries face external debt stress, the IMF and global finance insist on domestic debt restructuring as part of conditions associated with provision of emergency balance of payments finance or the restructuring of foreign debt.
Topic:
Debt, Investment, Currency, and Debt Restructuring
Political Geography:
Global Focus

3. The Failure of Debt-Based Development: Lessons From Argentina

Author:
Eugenio Andrea Bruno
Publication Date:
07-2006
Content Type:
Working Paper
Institution:
The Cato Institute
Abstract:
In this article I discuss the lessons one can learn from Argentina’s recent debt restructuring and the possible rules and practices of future restructurings. But I will also briefly describe the long and extremely problematic Argentine debt history, which started in 1824, to show the failure of the debt-based economic development model. I conclude that, regardless of any pyrrhic victory obtained from the restructuring process and the willingness of the international financial markets to lend new money, Argentina should not incur additional public debt.
Topic:
Debt, Development, Economics, and Debt Restructuring
Political Geography:
Argentina and South America

4. Restructuring in the Czech Republic- Beyond Ownership & Bankruptcy

Author:
Gerald A. McDermott and Aydin Hayri
Publication Date:
01-1995
Content Type:
Working Paper
Institution:
Minda de Gunzburg Center for European Studies, Harvard University
Abstract:
Restructuring of large industrial holdings in the Czech Republic (S-farms) depends on probes into new markets. The development and financing of probes generates internal holdups and stalemates among the government, banks, and S firms. The government tries to preserve the value of just-privatized S-firms while avoiding subsidies; banks, facing their delinquency, cannot force bankruptcy since keeping them as clients is as important as maintaining capital ade quacy. A compromise arises, 1MBR (intricate monitoring based restructuring), where the outside parties condition their involvement on a peculiar reorganization of the farm. We provide the empirical and theoretical underpinnings of IMBR, the emergence of which is neither deliberate nor accidental. (Keywords; Restructuring, privatization, incom plete contracts, monitoring) ·We use aliases for the names of their companies and their managers to protect their privacy. An earlier version of this paper was presented at the Ford Foundation Conference on CR transition at CERGE-EI. Prague CR. May 1994. '!The research was conducted at CERGE-EI. Prague CR. where Hayri was a visiting professor and McDermott is a visiting re searcher. McDermott's dissertation research was supported by generous grants from the US-CR Fulbright Commission and the Center for European Studies. Harvard University. The authors would like to thank CERGE-EI for its gracious administra tive support and hospitality and the following people for insightful comments and help: Suzanne Berger. Ales Capek. Zhi­yuan Cui. Jeremy Edwards. John Griffin, Miroslav Hrncir. Mike Jetton. Tony Levitas, Richard Locke. Ivana MazaIkova, Gerard Roland. Charles Sabel, David Stark. Frantisek Turnovec, and participants in a seminar at the University of Warwick.
Topic:
Privatization, Industry, Farming, Ownership, Debt Restructuring, and Bankruptcy
Political Geography:
Eastern Europe and Czech Republic