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Sovereign Default, Debt Restructuring, and Recovery Rates: Was the Argentinean "Haircut" Excessive?

Sebastian Edwards

NBER Working Paper No. 20964
Issued in February 2015
NBER Program(s):International Finance and Macroeconomics

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.

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Document Object Identifier (DOI): 10.3386/w20964

Published: Sebastian Edwards, 2015. "Sovereign Default, Debt Restructuring, and Recovery Rates: Was the Argentinean “Haircut” Excessive?," Open Economies Review, vol 26(5), pages 839-867.

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