Sovereign Default, Debt Restructuring, and Recovery Rates: Was the Argentinean “Haircut” Excessive?
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I use data on 180 sovereign defaults to analyze what determines the recovery rate after a debt restructuring process. Why do creditors recover, in some cases, more than 90 %, while in other cases they recover less than 10 %? I find support for the Grossman and Van Huyk model of “excusable defaults”: countries that experience more severe negative shocks tend to have higher “haircuts” than countries that face less severe shocks. I discuss in detail debt restructuring episodes in Argentina, Chile, Uruguay and Greece. The results suggest that the haircut imposed by Argentina in its 2005 restructuring (75 %) was “excessively high.” The other episodes’ haircuts are consistent with the model.
KeywordsDebt Sovereign Default Restructuring Repudiation Investors’ losses Haircut Argentina Excusable default Recovery rate Greece Chile
JEL ClassificationF340 F410 F650 G150
* I thank Alvaro Felipe García and Jorge Bromberg for their assistance. Subsection 2.2 draws, partially, on a report prepared for White & Case LLP in September, 2012. As always, discussions with Ed Leamer have been very useful. I also thank participants at UCLA’s finance seminar for helpful discussion. I thank George Tavlas for his comments.
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