Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics

Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics
Author :
Publisher : International Monetary Fund
Total Pages : 48
Release :
ISBN-10 : 9781498387620
ISBN-13 : 1498387624
Rating : 4/5 (20 Downloads)

Synopsis Sovereign Defaults, External Debt, and Real Exchange Rate Dynamics by : Mr.Tamon Asonuma

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign’s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.

Sovereign Defaults, External Debt and Real Exchange Rate Dynamics

Sovereign Defaults, External Debt and Real Exchange Rate Dynamics
Author :
Publisher :
Total Pages : 42
Release :
ISBN-10 : OCLC:1308875020
ISBN-13 :
Rating : 4/5 (20 Downloads)

Synopsis Sovereign Defaults, External Debt and Real Exchange Rate Dynamics by : Tamon Asonuma

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis, using the case of Argentina's default in 2001, replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign's large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.

Sovereign Defaults

Sovereign Defaults
Author :
Publisher : International Monetary Fund
Total Pages : 32
Release :
ISBN-10 : UCSD:31822032145963
ISBN-13 :
Rating : 4/5 (63 Downloads)

Synopsis Sovereign Defaults by : Luis Catão

Sovereign Debt Repatriation During Crises

Sovereign Debt Repatriation During Crises
Author :
Publisher : International Monetary Fund
Total Pages : 43
Release :
ISBN-10 : 9798400207211
ISBN-13 :
Rating : 4/5 (11 Downloads)

Synopsis Sovereign Debt Repatriation During Crises by : Mr. Serkan Arslanalp

We use a new, comprehensive data set on the sovereign debt investor base to document three novel empirical facts: (i) sovereign debt is repatriated - that is, shifted from external private to domestic investors - prior to sovereign defaults; (ii) not all crises are equal: evidence for repatriation during banking and currency crises is more limited; and (iii) the nature of defaults matters: external investors do not leave during preemptive debt restructurings. We further show that repatriation appears to be prevalent when defaults happen in large markets with low capital controls. The data set we use is uniquely suited to analyzing investor base dynamics during rare crises due to its large cross-section and time series, covering 180 countries from 1989 to 2020.

Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets

Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets
Author :
Publisher : International Monetary Fund
Total Pages : 40
Release :
ISBN-10 : 9781451961942
ISBN-13 : 1451961944
Rating : 4/5 (42 Downloads)

Synopsis Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets by : Mr.Udaibir S. Das

Top down spillovers of sovereign default risk can have serious consequences for the private sector in emerging markets. This paper analyzes the effects of these spillovers using firm-level data from 31 emerging market economies. We assess how sovereign risk affects corporate access to international capital markets, in the form of external credit (loans and bond issuances) and equity issuances. The study first analyzes the impact of sovereign debt crises during the 1980s and 1990s. It goes on to examine the 1993 to 2007 period, using additional measures of sovereign risk-sovereign bond spreads and sovereign ratings-as explanatory variables. Overall, we find that sovereign default risk is a crucial determinant of private sector access to capital, be it external debt or equity. We also find that crisis resolution patterns matter and that defaults towards private creditors have stronger adverse consequences than defaults to official creditors.

Essays on Sovereign Default

Essays on Sovereign Default
Author :
Publisher :
Total Pages : 124
Release :
ISBN-10 : OCLC:960450401
ISBN-13 :
Rating : 4/5 (01 Downloads)

Synopsis Essays on Sovereign Default by : Tiago Gomes da Silva Tavares

"This dissertation contributes to literature of International Economics and, in particular, of Sovereign Default with the study of three distinct issues. In the first chapter, I study the role of international reserves in sovereign debt restructuring episodes when fiscal adjustment is costly. This study departs from the observation that highly indebted developing economies commonly also hold large external reserves. This behavior seems puzzling given that governments in these countries borrow with an interest rate penalty to compensate lenders for default risk. Reducing debt to the same extent as reserves would maintain net liabilities constant while decreasing interest payments. However, holding reserves can have insurance benefits in a financial crisis. To rationalize the levels of international reserves and external debt observed in the data, a standard dynamic model of equilibrium default is extended to include distortionary taxation and debt restructuring. This chapter shows that fiscal adjustments induced by sovereign default can generate large demand for reserves if taxation is distortionary. At the same time, a non-negligible position in reserves modifies the debt restructuring negotiations upon default. A calibrated version of the model produces recovery rate schedules that are increasing with reserves, as seen in the data, being also able to replicate large positions of reserves and debt to GDP. Finally, I study how both mechanisms play a key quantitative role to generate such result, in fact, not including them, produces a counterfactual demand for reserves that is close to zero. In the second chapter, the relationship between labor market distortions and sovereign debt crises is explored. It is noted that risk of sovereign debt default has frequently affected both emerging market and developed economies. Such financial crises are often accompanied with severe declines of employment that are hard to justify using a standard dynamic stochastic model. In this chapter, I document that a labor wedge deteriorates substantially around swift reversals of current accounts or default episodes. I propose and evaluate two different explanations for these movements by linking the wedges to changes in labor taxes and in the cost of working capital. With these two features included, a dynamic model of equilibrium default is able to replicate the behavior of the labor wedge observed in the data around financial crisis. In the model, higher interest rates are propagated into larger costs of hiring labor through the presence of working capital. As an economy is hit with a stream of bad productivity shocks, the incentives to default become stronger, thus increasing the cost of debt. This reduces firm demand for labor and generates a labor wedge. A similar effect is obtained with a countercyclical tax rate policy. The model is used to shed light on the recent events of the Euro Area debt crisis and in particular of the Greek default event. Finally, in the third chapter, I develop a debt-to-output decomposition and document that a large fraction of the increase in the debt to output ratio during default is accounted by variations in the exchange rate. Also, using a large dataset on historical sovereign debt crises, it is shown in this chapter that devaluations of the exchange rate during periods of default are positively associated with international investor losses (haircuts) when debt is restructured. These results can be rationalized with the fact that large real devaluation decrease output when measured in foreign goods, thus reducing the availability of resources that can be used during negotiations. This implies that exchange rate fluctuations are an important source of risk in emerging economies affecting, among other things, debt dynamics and restructuring outcomes. As such, I conclude that most of the exchange rate neglect, typical in the sovereign default literature, should be seriously reconsidered"--Pages iii-v.

Sovereign Debt

Sovereign Debt
Author :
Publisher : John Wiley & Sons
Total Pages : 435
Release :
ISBN-10 : 9781118017555
ISBN-13 : 1118017552
Rating : 4/5 (55 Downloads)

Synopsis Sovereign Debt by : Rob Quail

An intelligent analysis of the dangers, opportunities, and consequences of global sovereign debt Sovereign debt is growing internationally at a terrifying rate, as nations seek to prop up their collapsing economies. One only needs to look at the sovereign risk pressures faced by Greece, Spain, and Ireland to get an idea of how big this problem has become. Understanding this dilemma is now more important than ever, that's why Robert Kolb has compiled Sovereign Debt. With this book as your guide, you'll gain a better perspective on the essential issues surrounding sovereign debt and default through discussions of national defaults, systemic risk, associated costs, and much more. Historical studies are also included to provide a realistic framework of reference. Contains up-to-date research and analysis on sovereign debt from today's leading practitioners and academics Details the dangers of defaults and their associated systemic risks Explores the past, present, and future of sovereign debt The repercussions of a national default are all-encompassing as global markets are intricately interwoven in the modern world. Sovereign Debt examines what it will take to overcome the challenges of this market and how you can deal with the uncertainty surrounding it.

Serial Sovereign Defaults and Debt Restructurings

Serial Sovereign Defaults and Debt Restructurings
Author :
Publisher : International Monetary Fund
Total Pages : 25
Release :
ISBN-10 : 9781513596648
ISBN-13 : 1513596640
Rating : 4/5 (48 Downloads)

Synopsis Serial Sovereign Defaults and Debt Restructurings by : Mr.Tamon Asonuma

Emerging countries that have defaulted on their debt repayment obligations in the past are more likely to default again in the future than are non-defaulters even with the same external debt-to-GDP ratio. These countries actually have repeated defaults or restructurings in short periods. This paper explains these stylized facts within a dynamic stochastic general equilibrium framework by explicitly modeling renegotiations between a defaulting country and its creditors. The quantitative analysis of the model reveals that the equilibrium probability of default for a given debt-to-GDP level is weakly increasing with the number of past defaults. The model also accords with an additional fact: lower recovery rates (high NPV haircuts) are associated with increases in spreads at renegotiation.

Dollars, Debt, and Deficits

Dollars, Debt, and Deficits
Author :
Publisher : International Monetary Fund
Total Pages : 410
Release :
ISBN-10 : 1589064534
ISBN-13 : 9781589064539
Rating : 4/5 (34 Downloads)

Synopsis Dollars, Debt, and Deficits by : International Monetary Fund

This book examines the challenges facing the international monetary and financial system, as well as the future role of the Bretton Woods institutions in addressing those challenges. The volume is based on the proceedings of a 2004 conference cosponsored by the Banco de Espana and the International Monetary Fund to commemorate the 60th anniversary of the Bretton Woods meetings in July 1944. The chapters look at global imbalances, exchange rate issues, debt in emerging economies, and innovations in private and multilateral lending.

Exchange Rate Policy and Debt Crises in Emerging Economies

Exchange Rate Policy and Debt Crises in Emerging Economies
Author :
Publisher : International Monetary Fund
Total Pages : 23
Release :
ISBN-10 : 9781451848076
ISBN-13 : 1451848072
Rating : 4/5 (76 Downloads)

Synopsis Exchange Rate Policy and Debt Crises in Emerging Economies by : Mr.Samir Jahjah

We explore a model intended to capture the interaction between exchange rate policy, fiscal policy, and outright default on foreign-currency denominated debt. We examine how the exchange rate affects the supply of short-term debt facing the government. We show that under a credible hard peg (currency board), default is a more likely outcome, even without an exceptionally large short-term debt, precisely because a devaluation is not an option. In a more conventional fixed peg, it can be optimal for the government to choose a level of the exchange rate that would be likely to result in partial or complete debt default. Depending on the exchange rate regime, multiple equilibria exist, in one of which the interest rate is high, the exchange rate is overvalued, output is low, and default is high. Under a hard peg, there is a unique equilibrium.