Essays on Sovereign Debt Restructuring

Abstract

This dissertation consists of three chapters. In the first chapter, I provide a reviewof the literature on sovereign debt restructurings. I discuss clauses in sovereign debt contracts that often dictate the rules of debt restructuring. I also summarize some empirical regularities and policy concerns regarding debt relief, default duration and subsequent capital market exclusions, preemptive default, and legal disputes. Finally, I indicate how the literature on quantitative sovereign debt models has addressed these policy concerns. In the second chapter, I develop a sovereign debt model with endogenous re-entry to international financial markets via debt renegotiation and a possibility for lenders to holdout and litigate. This renders the outcome of a renegotiation process to be characterized by both a haircut and a lenders' participation rate. I use this model to show that the lenders' threat to litigate buys commitment to the sovereign. Precisely, in order to increase the lenders' participation rate and hence reduce subsequent litigation, governments in default negotiate lower haircuts; as a result, lenders charge lower spreads ex-ante during the periods in which the country has access to international financial markets. I use this model to evaluate the role of collective action clauses and find that the optimal threshold for the economy of Argentina during the 1990s was 80%, which is only 5pp above the most widespread threshold used in sovereign debt contracts under NY law since the 2001 Argentine default. In the third chapter, Agustin Samano and I study the optimal accumulation of international reserves in a two-period model of sovereign debt restructuring. I show that countries manage their reserves taking into account that these assets affect the outcomes of debt restructurings. In particular, countries may accumulate reserves while in default in order to improve their bargaining power in eventual debt restructurings.