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This paper estimates the determinants of external debt distress in low-income countries (LICs), disentangling the roles of institutions, shocks, and policies. The most prominent factors in raising the risk of debt distress are the weak protection of private property rights, adverse shocks to real non-oil commodity prices, and a high debt burden. Results also suggest that weak economic institutions tend to raise the probability of debt distress through persistently weak economic policies and high vulnerability to external shocks. The model enables a more granular analysis of debt sustainability in LICs and has a higher predictive power compared to the earlier scant literature.
Exports and Imports --- International Lending and Debt Problems --- International economics --- Debt sustainability --- External debt --- Debt burden --- Debt default --- Public and publicly-guaranteed external debt --- Debts, External --- United States
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Do Highly Indebted Poor Countries (HIPCs) suffer from a debt overhang? Is debt relief going to improve their growth rates? To answer these important questions, we look at how the debt-growth relationship varies with indebtedness levels and other country characteristics in a panel of developing countries. Our findings suggest that there is a negative marginal relationship between debt and growth at intermediate levels of debt, but not at very low debt levels, below the “debt overhang” threshold, or at very high levels, above the “debt irrelevance” threshold. Countries with good policies and institutions face overhang when debt rises above 15-30 percent of GDP, but the marginal effect of debt on growth becomes irrelevant above 70-80 percent. In countries with bad policies and institutions, overhang and irrelevance thresholds seem to be lower, but we cannot rule out the possibility that debt does not matter at all.
Debt relief -- Developing countries. --- Debts, External -- Developing countries. --- Electronic books. -- local. --- Exports and Imports --- Financial Risk Management --- International Lending and Debt Problems --- Debt --- Debt Management --- Sovereign Debt --- International economics --- Finance --- Debt burden --- Debt relief --- Debt service --- Debt default --- External debt --- Debts, External --- United States
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Rejecting a common assumption in the sovereign debt literature, we document that creditor losses (“haircuts”) during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999–2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.
Exports and Imports --- Financial Risk Management --- Investments: General --- Investments: Bonds --- Macroeconomics --- International Lending and Debt Problems --- Open Economy Macroeconomics --- Debt --- Debt Management --- Sovereign Debt --- General Financial Markets: General (includes Measurement and Data) --- Price Level --- Inflation --- Deflation --- Investment & securities --- International economics --- Finance --- Asset prices --- Bonds --- Securities --- Debt default --- Debt restructuring --- Prices --- Financial institutions --- External debt --- Asset and liability management --- Debts, External --- Financial instruments --- Greece
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This paper contains an empirical investigation of the set of economic and political conditions that are associated with a likely occurrence of a sovereign debt crisis. We use a new statistical approach (Binary Recursive Tree) that allows us to derive a collection of "rules of thumb" that help identify the typical characteristics of defaulters. We find that not all crises are equal: they differ depending on whether the government faces insolvency, illiquidity, or various macroeconomic risks. We also characterize the set of fundamentals that can be associated with a relatively "risk free" zone. This classification is important for discussing appropriate policy options to prevent crises and improve response time and prediction.
Debts, External. --- Default (Finance). --- Electronic books. -- local. --- Financial crises. --- Exports and Imports --- Financial Risk Management --- Public Finance --- International Lending and Debt Problems --- Financial Crises --- Debt --- Debt Management --- Sovereign Debt --- International economics --- Economic & financial crises & disasters --- Public finance & taxation --- External debt --- Financial crises --- Debt default --- Public debt --- Debt service --- Debts, External --- Debts, Public --- Turkey
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The concept of market-based fiscal discipline posits that a government which runs persistent, excessive fiscal deficits will face an increased cost of borrowing and eventually, a reduced availability of credit, and that these market actions will provide an incentive to correct irresponsible fiscal behavior. This paper presents new empirical evidence on market-based fiscal discipline by estimating the relationship between the cost of borrowing and fiscal policy behavior across U.S. states. We find that U.S. states which have followed more prudent fiscal policies are perceived by the market as having lower default risk and are therefore able to reap the benefit of lower borrowing costs.
Exports and Imports --- Investments: Bonds --- Public Finance --- International Lending and Debt Problems --- General Financial Markets: General (includes Measurement and Data) --- Fiscal Policy --- Debt --- Debt Management --- Sovereign Debt --- International economics --- Investment & securities --- Macroeconomics --- Public finance & taxation --- Debt default --- Fiscal policy --- Bonds --- Municipal bonds --- Government asset and liability management --- External debt --- Financial institutions --- Public financial management (PFM) --- Debts, External --- Finance, Public --- United States
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The paper analyzes and quantifies the importance of sovereign risk in determining corporate default premia (yield spreads). It also investigates the extent to which the practice by rating agencies and banks of not rating companies higher than their sovereign ("country or sovereign ceiling") is reflected in the yields of South African local-currency-denominated corporate bonds. The main findings are: (i) sovereign risk appears to be the single most important determinant of corporate default premia in South Africa; (ii) the sovereign ceiling (in local-currency terms) does not apply in the spreads of the industrial multinational companies in the sample; and (iii) consistent with rating agency policy, however, the sovereign ceiling appears to apply in the spreads of most financial companies in the sample.
Corporations -- Finance. --- Country risk -- South Africa. --- Electronic books. -- local. --- South Africa -- Economic conditions. --- Exports and Imports --- Finance: General --- Investments: Bonds --- General Financial Markets: General (includes Measurement and Data) --- International Lending and Debt Problems --- Investment & securities --- International economics --- Finance --- Corporate bonds --- Bonds --- Debt default --- Sovereign bonds --- Emerging and frontier financial markets --- Debts, External --- Financial services industry --- South Africa
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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.
Exports and Imports --- Foreign Exchange --- Central Banks and Their Policies --- Fiscal Policy --- International Monetary Arrangements and Institutions --- International Lending and Debt Problems --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- Currency --- Foreign exchange --- International economics --- Exchange rates --- Exchange rate policy --- Real exchange rates --- Debt default --- Exchange rate adjustments --- External debt --- Debts, External --- Mexico
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Crises on external sovereign debt are typically defined as defaults. Such a definition accurately captures debt-servicing difficulties in the 1980s, a period of numerous defaults on bank loans. However, defining defaults as debt crises is problematic for the 1990s, when sovereign bond markets emerged. In contrast to the 1980s, the 1990s are characterized by significant foreign debt-servicing difficulties but fewer sovereign defaults. In order to capture this evolution of debt markets, we define debt crises as events occurring when either a country defaults or its bond spreads are above a critical threshold. We find that our definition outperforms the default-based definition in capturing debt-servicing difficulties and, consequently, in fitting the post-1994 period. In particular, liquidity indicators are significant in explaining our definition of debt crises, while they do not play any role in explaining defaults after 1994.
Banks and Banking --- Exports and Imports --- Finance: General --- Financial Risk Management --- Investments: Bonds --- Financial Crises --- International Lending and Debt Problems --- General Financial Markets: General (includes Measurement and Data) --- Interest Rates: Determination, Term Structure, and Effects --- Economic & financial crises & disasters --- International economics --- Finance --- Investment & securities --- Financial crises --- Debt default --- Yield curve --- Securities markets --- Sovereign bonds --- Debts, External --- Interest rates --- Capital market --- Bonds --- United States
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In a large panel of countries, we find that less liquid countries are more likely to default on their external debt. Specifically, for given total external debt, the probability of a crisis increases with the proportion of short-term debt and debt service coming due and decreases with foreign exchange reserves. This correlation, however, is consistent with a standard model of optimal default and need not be ascribed to self-fulfilling creditor runs. Also, the correlation with short-term debt appears to be driven by joint endogeneity. The policy implications are discussed.
Exports and Imports --- Finance: General --- Financial Risk Management --- International Lending and Debt Problems --- Current Account Adjustment --- Short-term Capital Movements --- Financial Crises --- Portfolio Choice --- Investment Decisions --- International economics --- Economic & financial crises & disasters --- Finance --- Financial crises --- Liquidity --- Debt default --- Debt service --- External debt --- Asset and liability management --- Debts, External --- Economics --- Mexico
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In an environment characterized by weak contractual enforcement, sovereign lenders can enhance the likelihood of repayment by making their claims more difficult to restructure ex post. We show however, that competition for repayment among lenders may result in a sovereign debt that is excessively difficult to restructure in equilibrium. This inefficiency may be alleviated by a suitably designed bankruptcy regime that facilitates debt restructuring.
Exports and Imports --- Financial Risk Management --- Public Finance --- Debt --- Debt Management --- Sovereign Debt --- Financial Crises --- International Lending and Debt Problems --- Public finance & taxation --- Finance --- Economic & financial crises & disasters --- International economics --- Public debt --- Sovereign debt restructuring --- Debt restructuring --- Financial crises --- Debt default --- Debts, Public --- Debts, External --- Argentina
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