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Sovereign Debt Restructuring: The Costs of Delay

PDF of the draft paper is here: PDF 

By Brett House a, Mark Joy b, and Nelson Sobrinho c

(This version: 4 October, 2017)

Abstract

Sovereign debt restructurings can be protracted affairs, not only in their resolution but also in their inception. In this paper, we develop a new database to look at sovereign debt restructurings since 1989, from their earliest identifiable origins in episodes of sovereign debt overhang and distress, to their final settlement, and we compile a set of stylised facts that offer evidence of the costs of delay. We find that the pre-restructuring period, from the onset of the debt problem to the announcement of the restructuring, is typically more than twice as long (7.9 years) as the subsequent period of negotiation (3.0 years), and is associated with bigger cumulative output losses, of around 18% of GDP. In terms of the costs to creditors, we find that the longer it takes to announce a restructuring, the larger the eventual haircut for the creditors and the more likely the restructuring will come after an outright default rather than pre-emptively. Larger haircuts for creditors are associated with more costly borrowing for the sovereign once it regains market access. In terms of policy implications, our results imply a bigger focus should be placed on encouraging debtor countries to take the early warning signs of a debt problem seriously and to engage proactively with their creditors once debt problems do surface, so both sides can either work on addressing those problems before they get out of hand, or if necessary, agree on a restructuring at a lower cost.

JEL Codes: E43, F34, G15, H63.

Keywords: Sovereign debt crises, debt restructuring, debt overhang.

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(b) Corresponding author: Mark Joy, Bank of England, London EC2R 8AH. Email: [email protected]

We thank Ming Qui for her excellent research assistance and David Beers and Glenn Hoggarth for helpful comments. The paper benefited from discussion in seminars at the International Monetary Fund and the Bank of England. The opinions expressed in this paper are solely those of the authors and do not necessarily reflect the views of the International Monetary Fund, the Bank of England, or the Bank of Nova Scotia (Scotiabank).

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