Optimal Maturity Structure Of Sovereign Debt In Situation Of Near Default
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Author | : Gabriel Desgranges |
Publisher | : International Monetary Fund |
Total Pages | : 43 |
Release | : 2014-09-12 |
Genre | : Business & Economics |
ISBN | : 1498330436 |
We study the relationship between default and the maturity structure of the debt portfolio of a Sovereign, under uncertainty. The Sovereign faces a trade-off between a future costly default and a high current fiscal effort. This results into a debt crisis in case a large initial issuance of long term debt is followed by a sequence of negative macro shocks. Prior uncertainty about future fundamentals is then a source of default through its effect on long term interest rates and the optimal debt issuance. Intuitively, the Sovereign chooses a portfolio implying a risk of default because this risk generates a correlation between the future value of long term debt and future fundamentals. Long term debt serves as a hedging instrument against the risk on fundamentals. When expected fundamentals are high, the Sovereign issues a large amount of long term debt, the expected default probability increases, and so does the long term interest rate.
Author | : Gabriel Desgranges |
Publisher | : |
Total Pages | : 42 |
Release | : 2014 |
Genre | : |
ISBN | : |
Author | : Diego J. Perez |
Publisher | : |
Total Pages | : 44 |
Release | : 2013 |
Genre | : |
ISBN | : |
Author | : Mr. Philip Barrett |
Publisher | : International Monetary Fund |
Total Pages | : 74 |
Release | : 2021-04-23 |
Genre | : Business & Economics |
ISBN | : 1513582518 |
This paper examines ways to summarize the maturity structure of public debts using a small number of parameters. We compile a novel dataset of all promised future payments for US and UK government debt from every month since 1869, and more recently for Peru, Poland, Egypt, and Nigeria. We show that there is a unique parametric form which does not arbitrarily restrict debt issuance – portfolios of bonds with exponential coupons. Compared to the most popular alternative, this form 1) more accurately describes changes in debt maturity for these six countries and 2) gives a quite different interpretation of historical debt maturity. Our work can be applied not just to analyze past debt movements, but – because parameter estimates are relatively similar across countries – also for monitoring changes in debt maturity, including in countries where data are partial or incomplete.
Author | : Cristina Arellano |
Publisher | : |
Total Pages | : |
Release | : 2015 |
Genre | : |
ISBN | : |
This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. To account for this pattern, we build a dynamic model of international borrowing with endogenous default and multiple maturities of debt. Short-term debt can deliver higher immediate consumption than long-term debt; large long-term loans are not available because the borrower cannot commit to save in the near future towards repayment in the far future. However, issuing long-term debt can insure against the need to roll-over short-term debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its co-movement with the level of spreads across maturities.
Author | : Sophia Chen |
Publisher | : International Monetary Fund |
Total Pages | : 77 |
Release | : 2019-02-05 |
Genre | : Business & Economics |
ISBN | : 1484397630 |
The maturity structure of debt can have financial and real consequences. Short-term debt exposes borrowers to rollover risk (where the terms of financing are renegotiated to the detriment of the borrower) and is associated with financial crises. Moreover, debt maturity can have an impact on the ability of firms to undertake long-term productive investments and, as a result, affect economic activity. The aim of this paper is to examine the evolution and determinants of debt maturity and to characterize differences across countries.
Author | : Francesco Drudi |
Publisher | : |
Total Pages | : 58 |
Release | : 1996 |
Genre | : Debts, Public |
ISBN | : |
Author | : Gabriel P. Mihalache |
Publisher | : |
Total Pages | : 101 |
Release | : 2016 |
Genre | : Debt relief |
ISBN | : |
"This dissertation consists of three essays concerning the way in which emerging market governments actively manage the maturity structure of their external, public debt, and the consequences of this behavior for their capital accounts, cost of borrowing, and default frequency. Each chapter employs quantitative-theoretic, macroeconomic methods to address outstanding puzzles in the literature or, as in the case of Chapter 3, new concerns about the data and assumptions customarily used when addressing these topics. The first chapter studies the debt restructuring process, which is eventually triggered following default. The empirical literature shows that increases in the maturity of debt provide the bulk of debt relief, during these proceedings. Countries emerge with a greater share of their debt in the form of long-term bonds, compared to what they owed at the time of default. A standard maturity choice model, once augmented with a renegotiation stage, is unable to replicate this critical feature of the data. We draw sharp parallels between the choice of maturity at the time of issuance and during the swap in order to explain this negative result. Introducing stochastic political turnover, due to which policy becomes more or less impatient over time, can solve the puzzle and explain observed outcomes. We interpret this finding as providing additional evidence on the role of political economy frictions in emerging markets. The second Chapter turns to the main outstanding puzzle in the debt maturity literature, which is the finding that, during bad times, emerging markets borrow using short-term debt. Using Bloomberg bond data for eleven emerging economies, we document that countries react to crises by issuing debt with shorter maturity but that, critically, they back-load payment schedules. To account for this pattern, we develop a sovereign default model with an endogenous choice of debt maturity and payment schedule. In the model, during recessions, the country prefers its payments to be more back-loaded--delaying relatively larger payments--to smooth consumption. However, such a back-loaded schedule is expensive given that later payments carry higher default risk. To reduce borrowing costs, the country optimally shortens maturity. When calibrated to the Brazilian data, the model can rationalize the observed patterns of maturity and payment schedule, as an optimal trade-off between consumption smoothing and endogenous borrowing cost. The last Chapter concerns the use of seasonally-adjusted time series in the calibration and evaluation of macroeconomic models. We argue that in the case of nonlinear models in general, and for sovereign default models in particular, such a practice is liable to yield misleading results and targets for quantitative work. We illustrate this point by constructing and calibrating a sovereign debt and default model which nests several salient cases from the literature. We find that allowing for long-term debt eliminates a counterfactual seasonal pattern in asset prices, exhibited by the benchmark, one-period debt model."--Pages iv-v.
Author | : Alex Pienkowski |
Publisher | : International Monetary Fund |
Total Pages | : 21 |
Release | : 2017-05-22 |
Genre | : Business & Economics |
ISBN | : 1484300653 |
This paper provides a tractable framework to assess how the structure of debt instruments—specifically by currency denomination and indexation to GDP—can raise the debt limit of a sovereign. By calibrating the model to different country fundamentals, it is clear that there is no one-size-fits-all approach to optimal instrument design. For instance, low income countries may find benefit in issuing local currency debt; while in advanced economies debt tolerance can be substantially enhanced through issuing GDP-linked bonds. By looking at the marginal impact of these instruments, the paper also provides insight into the optimal portfolio compostion.
Author | : Rudiger Dornbusch |
Publisher | : Cambridge University Press |
Total Pages | : 384 |
Release | : 1990-11-30 |
Genre | : Business & Economics |
ISBN | : 9780521392662 |
As Europe proceeds towards economic and monetary union, fiscal convergence and the prospect of a common money are at the centre of discussion. This volume from the Centre for Economic Policy Research brings together theoretical, applied and historical research on the management of public debt and its implications for financial stability.