Uncertainty Premia Sovereign Default Risk And State Contingent Debt

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Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt

Mr. Francisco Roch,Francisco Roldán
Uncertainty Premia Sovereign Default Risk and State Contingent Debt Book PDF

Author : Mr. Francisco Roch,Francisco Roldán
Publisher : International Monetary Fund
Page : 38 pages
File Size : 48,5 Mb
Release : 2021-03-12
Category : Business & Economics
ISBN : 9781513572635

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Uncertainty Premia, Sovereign Default Risk, and State-Contingent Debt by Mr. Francisco Roch,Francisco Roldán Pdf

We analyze how concerns for model misspecification on the part of international lenders affect the desirability of issuing state-contingent debt instruments in a standard sovereign default model à la Eaton and Gersovitz (1981). We show that for the commonly used threshold state-contingent bond structure (e.g., the GDP-linked bond issued by Argentina in 2005), the model with robustness generates ambiguity premia in bond spreads that can explain most of what the literature has labeled as novelty premium. While the government would be better off with this bond when facing rational expectations lenders, this additional source of premia leads to welfare losses when facing robust lenders. Finally, we characterize the optimal design of the state-contingent bond and show how it varies with the level of robustness. Our findings rationalize the little use of these instruments in practice and shed light on their optimal design.

The Premia on State-Contingent Sovereign Debt Instruments

Deniz Igan,Mr. Taehoon Kim,Antoine Levy
The Premia on State Contingent Sovereign Debt Instruments Book PDF

Author : Deniz Igan,Mr. Taehoon Kim,Antoine Levy
Publisher : International Monetary Fund
Page : 48 pages
File Size : 55,9 Mb
Release : 2021-12-03
Category : Business & Economics
ISBN : 9781616357009

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The Premia on State-Contingent Sovereign Debt Instruments by Deniz Igan,Mr. Taehoon Kim,Antoine Levy Pdf

State-contingent debt instruments such as GDP-linked warrants have garnered attention as a potential tool to help debt-stressed economies smooth repayments over business cycles, yet very few studies of the empirical properties of these instruments exist. This paper develops a general f ramework to estimate the time-varying risk premium of a state-contingent sovereign debt instrument. Our estimation framework applied to GDP-linked warrants issued by Argentina, Greece, and Ukraine reveals three stylized facts: (i) the risk premium in state-contingent instruments is high and persistent; (ii) the risk premium exhibits a pro-cyclical pattern; and (iii) the liquidity premium is higher and more volatile than that for plain-vanilla government bonds issued by the same sovereign. We then present a model in which investors fear ambiguity and that can account for the cyclical properties of the risk premium.

Optimal State Contingent Sovereign Debt Instruments

Mr. Alejandro D Guerson
Optimal State Contingent Sovereign Debt Instruments Book PDF

Author : Mr. Alejandro D Guerson
Publisher : International Monetary Fund
Page : 31 pages
File Size : 40,9 Mb
Release : 2021-09-10
Category : Business & Economics
ISBN : 9781513595917

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Optimal State Contingent Sovereign Debt Instruments by Mr. Alejandro D Guerson Pdf

This paper shows that the optimal sovereign lending contract is state-contingent when a government can default. It provides a theoretical basis for the specification of optimal state-contingent debt instruments (SCDIs) in countries subject to large shocks that can be observed and verified by all parties involved, such as natural disasters or global pandemics. The result is obtained as the endogenous solution to a contracting problem under time-inconsistency when a government cannot credibly commit to honor debt service obligations in all possible states of nature. It is shown that rational investors optimally offer SCDIs that include additional financing when the default constraint is binding, keeping the debtor engaged in the contractual relationship and avoiding asset loss. The debtor benefits because the contract implies net-positive financing when facing a large shock, increasing concurrent welfare, while maintaining access to financing in the future for consumption smoothing at the same terms as with precommitment. SCDIs require maintaining debt at a low level compared to the precommitment case, and also a fiscal consolidation when triggered to contain the increase in debt. Extension of the time inconsistency problem to add the taxation of capital returns shows that the optimal physical capital investment is also state-contingent.

Sovereign Debt

Rob Quail
Sovereign Debt Book PDF

Author : Rob Quail
Publisher : John Wiley & Sons
Page : 435 pages
File Size : 50,9 Mb
Release : 2011-02-25
Category : Business & Economics
ISBN : 9781118017555

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Sovereign Debt by Rob Quail Pdf

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.

Sovereign Debt

Mr. Leonardo Martinez,Mr. Francisco Roch,Francisco Roldán,Mr. Jeromin Zettelmeyer
Sovereign Debt Book PDF

Author : Mr. Leonardo Martinez,Mr. Francisco Roch,Francisco Roldán,Mr. Jeromin Zettelmeyer
Publisher : International Monetary Fund
Page : 47 pages
File Size : 44,7 Mb
Release : 2022-06-17
Category : Business & Economics
ISBN : 9798400213250

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Sovereign Debt by Mr. Leonardo Martinez,Mr. Francisco Roch,Francisco Roldán,Mr. Jeromin Zettelmeyer Pdf

This paper surveys the literature on sovereign debt from the perspective of understanding how sovereign debt differs from privately issue debt, and why sovereign debt is deemed safe in some countries but risky in others. The answers relate to the unique power of the sovereign. One the one hand, a sovereign has the power to tax, making debt relatively safe; on the other, it also has control over its territory and most of its assets, making debt enforcement difficult. The paper discusses debt contracts and the sovereign debt market, sovereign debt restructurings, and the empirical and theoretical literatures on the costs and causes of defaults. It describes the adverse impact of sovereign default risk on the issuing countries and what explains this impact. The survey concludes with a discussion of policy options to reduce sovereign risk, including fiscal frameworks that act as commitment devices, state-contingent debt, and independent and credible monetary policy.

The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings

Charles Cohen,S. M. Ali Abbas,Myrvin Anthony,Tom Best,Mr.Peter Breuer,Hui Miao,Ms.Alla Myrvoda,Eriko Togo
The Role of State Contingent Debt Instruments in Sovereign Debt Restructurings Book PDF

Author : Charles Cohen,S. M. Ali Abbas,Myrvin Anthony,Tom Best,Mr.Peter Breuer,Hui Miao,Ms.Alla Myrvoda,Eriko Togo
Publisher : INTERNATIONAL MONETARY FUND
Page : 128 pages
File Size : 53,7 Mb
Release : 2020-11-19
Category : Business & Economics
ISBN : 1513556487

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The Role of State-Contingent Debt Instruments in Sovereign Debt Restructurings by Charles Cohen,S. M. Ali Abbas,Myrvin Anthony,Tom Best,Mr.Peter Breuer,Hui Miao,Ms.Alla Myrvoda,Eriko Togo Pdf

The COVID-19 crisis may lead to a series of costly and inefficient sovereign debt restructurings. Any such restructurings will likely take place during a period of great economic uncertainty, which may lead to protracted negotiations between creditors and debtors over recovery values, and potentially even relapses into default post-restructuring. State-contingent debt instruments (SCDIs) could play an important role in improving the outcomes of these restructurings.

Debt Dilution and Sovereign Default Risk

Dr. Leonardo Martinez,Juan Carlos Hatchondo,Cesar Sosa Padilla
Debt Dilution and Sovereign Default Risk Book PDF

Author : Dr. Leonardo Martinez,Juan Carlos Hatchondo,Cesar Sosa Padilla
Publisher : International Monetary Fund
Page : 29 pages
File Size : 51,9 Mb
Release : 2011-03-01
Category : Business & Economics
ISBN : 9781455225040

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Debt Dilution and Sovereign Default Risk by Dr. Leonardo Martinez,Juan Carlos Hatchondo,Cesar Sosa Padilla Pdf

We propose a modification to a baseline sovereign default framework that allows us to quantify the importance of debt dilution in accounting for the level and volatility of the interest rate spread paid by sovereigns. We measure the effects of debt dilution by comparing the simulations of the baseline model (with debt dilution) with the ones of the modified model without dilution. We calibrate the baseline model to mimic the mean and standard deviation of the spread, as well as the external debt level, the mean debt duration and a measure of default frequency in the data. We find that, even without commitment to future repayment policies and withoutcontingency of sovereign debt, if the sovereign could eliminate debt dilution, the number of default per 100 years decreases from 3.10 to 0.42. The mean spread decreases from 7.38% to 0.57%. The standard deviation of the spread decreases from 2.45 to 0.72. Default risk falls in part because of a reduction of the level of sovereign debt (36% of the face value and of 11% of the market value). But we show that the most important effect of dilution on default risk results from a shift in the set of government''s borrowing opportunities. Our analysis is also relevant for the study of other credit markets where the debt dilution problem could be present.

Care Homes in a Turbulent Era

Komla Dzigbede,W. B. Hildreth
Care Homes in a Turbulent Era Book PDF

Author : Komla Dzigbede,W. B. Hildreth
Publisher : Edward Elgar Publishing
Page : 459 pages
File Size : 54,5 Mb
Release : 2023-08-14
Category : Political Science
ISBN : 9781800379718

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Care Homes in a Turbulent Era by Komla Dzigbede,W. B. Hildreth Pdf

This scholarly Research Handbook captures key observations and analyses within the field of public financial management. It offers much-needed insights into possible future research ventures while presenting contemporary summaries of past studies in this ever-evolving field.

Research Handbook of Financial Markets

Refet S. Gürkaynak,Jonathan H. Wright
Research Handbook of Financial Markets Book PDF

Author : Refet S. Gürkaynak,Jonathan H. Wright
Publisher : Edward Elgar Publishing
Page : 533 pages
File Size : 49,8 Mb
Release : 2023-05-09
Category : Business & Economics
ISBN : 9781800375321

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Research Handbook of Financial Markets by Refet S. Gürkaynak,Jonathan H. Wright Pdf

The Research Handbook of Financial Markets carefully discusses the histories and current states of the most important financial markets and institutions, as well as explicitly underscoring open questions that need study. By describing the institutional structure of different markets and highlighting recent changes within them, it accurately highlights their evolving nature.

Managing the Sovereign-Bank Nexus

Mr.Giovanni Dell'Ariccia,Caio Ferreira,Nigel Jenkinson,Mr.Luc Laeven,Alberto Martin,Ms.Camelia Minoiu,Alex Popov
Managing the Sovereign Bank Nexus Book PDF

Author : Mr.Giovanni Dell'Ariccia,Caio Ferreira,Nigel Jenkinson,Mr.Luc Laeven,Alberto Martin,Ms.Camelia Minoiu,Alex Popov
Publisher : International Monetary Fund
Page : 54 pages
File Size : 49,9 Mb
Release : 2018-09-07
Category : Business & Economics
ISBN : 9781484359624

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Managing the Sovereign-Bank Nexus by Mr.Giovanni Dell'Ariccia,Caio Ferreira,Nigel Jenkinson,Mr.Luc Laeven,Alberto Martin,Ms.Camelia Minoiu,Alex Popov Pdf

This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.

A Primer on Managing Sovereign Debt-Portfolio Risks

Thordur Jonasson,Mr.Michael G. Papaioannou
A Primer on Managing Sovereign Debt Portfolio Risks Book PDF

Author : Thordur Jonasson,Mr.Michael G. Papaioannou
Publisher : International Monetary Fund
Page : 133 pages
File Size : 50,6 Mb
Release : 2018-04-06
Category : Business & Economics
ISBN : 9781484350546

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A Primer on Managing Sovereign Debt-Portfolio Risks by Thordur Jonasson,Mr.Michael G. Papaioannou Pdf

This paper provides an overview of sovereign debt portfolio risks and discusses various liability management operations (LMOs) and instruments used by public debt managers to mitigate these risks. Debt management strategies analyzed in the context of helping reach debt portfolio targets and attain desired portfolio structures. Also, the paper outlines how LMOs could be integrated into a debt management strategy and serve as policy tools to reduce potential debt portfolio vulnerabilities. Further, the paper presents operational issues faced by debt managers, including the need to develop a risk management framework, interactions of debt management with fiscal policy, monetary policy, and financial stability, as well as efficient government bond markets.

Global Waves of Debt

M. Ayhan Kose,Peter Nagle,Franziska Ohnsorge,Naotaka Sugawara
Global Waves of Debt Book PDF

Author : M. Ayhan Kose,Peter Nagle,Franziska Ohnsorge,Naotaka Sugawara
Publisher : World Bank Publications
Page : 403 pages
File Size : 54,6 Mb
Release : 2021-03-03
Category : Business & Economics
ISBN : 9781464815454

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Global Waves of Debt by M. Ayhan Kose,Peter Nagle,Franziska Ohnsorge,Naotaka Sugawara Pdf

The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.

A General Equilibrium Model of Sovereign Default and Business Cycles

Vivian Z. Yue,Mr. Enrique G. Mendoza
A General Equilibrium Model of Sovereign Default and Business Cycles Book PDF

Author : Vivian Z. Yue,Mr. Enrique G. Mendoza
Publisher : International Monetary Fund
Page : 32 pages
File Size : 44,7 Mb
Release : 2011-07-01
Category : Business & Economics
ISBN : 9781462330454

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A General Equilibrium Model of Sovereign Default and Business Cycles by Vivian Z. Yue,Mr. Enrique G. Mendoza Pdf

Emerging markets business cycle models treat default risk as part of an exogenous interest rate on working capital, while sovereign default models treat income fluctuations as an exogenous endowment process with ad-noc default costs. We propose instead a general equilibrium model of both sovereign default and business cycles. In the model, some imported inputs require working capital financing; default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around default triggers an efficiency loss as these inputs are replaced by imperfect substitutes; and default on public and private obligations occurs simultaneously. The model explains several features of cyclical dynamics around deraults, countercyclical spreads, high debt ratios, and key business cycle moments.

State-Contingent Debt Instruments for Sovereigns - Annexes

International Monetary Fund. Asia and Pacific Dept,International Monetary Fund. Strategy, Policy, & Review Department,International Monetary Fund. Legal Dept.,International Monetary Fund. Monetary and Capital Markets Department
State Contingent Debt Instruments for Sovereigns Annexes Book PDF

Author : International Monetary Fund. Asia and Pacific Dept,International Monetary Fund. Strategy, Policy, & Review Department,International Monetary Fund. Legal Dept.,International Monetary Fund. Monetary and Capital Markets Department
Publisher : International Monetary Fund
Page : 56 pages
File Size : 47,5 Mb
Release : 2017-05-22
Category : Business & Economics
ISBN : 9781498346801

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State-Contingent Debt Instruments for Sovereigns - Annexes by International Monetary Fund. Asia and Pacific Dept,International Monetary Fund. Strategy, Policy, & Review Department,International Monetary Fund. Legal Dept.,International Monetary Fund. Monetary and Capital Markets Department Pdf

These annexes accompany the IMF Policy Paper State Contingent Debt Instruments for Sovereigns

Sovereign Debt Restructurings 1950-2010

Mr.Udaibir S. Das,Mr.Michael G Papaioannou,Christoph Trebesch
Sovereign Debt Restructurings 1950 2010 Book PDF

Author : Mr.Udaibir S. Das,Mr.Michael G Papaioannou,Christoph Trebesch
Publisher : International Monetary Fund
Page : 128 pages
File Size : 51,8 Mb
Release : 2012-08-01
Category : Business & Economics
ISBN : 9781475505535

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Sovereign Debt Restructurings 1950-2010 by Mr.Udaibir S. Das,Mr.Michael G Papaioannou,Christoph Trebesch Pdf

This paper provides a comprehensive survey of pertinent issues on sovereign debt restructurings, based on a newly constructed database. This is the first complete dataset of sovereign restructuring cases, covering the six decades from 1950–2010; it includes 186 debt exchanges with foreign banks and bondholders, and 447 bilateral debt agreements with the Paris Club. We present new stylized facts on the outcome and process of debt restructurings, including on the size of haircuts, creditor participation, and legal aspects. In addition, the paper summarizes the relevant empirical literature, analyzes recent restructuring episodes, and discusses ongoing debates on crisis resolution mechanisms, credit default swaps, and the role of collective action clauses.