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Sovereign rating after private and official restructuring.

Silvia Marchesi1,2,3, Tania Masi1,2

  • 1University of Milano Bicocca, Italy.

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Sovereign debt restructuring with private creditors incurs reputational costs. However, countries defaulting on official debt experience no negative impact, suggesting selective defaults may be strategic.

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Area of Science:

  • Economics
  • International Finance
  • Political Economy

Background:

  • Sovereign debt restructuring is a critical issue in international finance.
  • Understanding the differential impacts of restructuring commercial versus official debt is crucial for economic stability.
  • Creditor loss, or haircut, is a key variable in assessing restructuring outcomes.

Purpose of the Study:

  • To analyze the relationship between sovereign debt restructuring and sovereign ratings.
  • To differentiate the effects of restructuring commercial debt versus official debt.
  • To investigate the role of creditor loss (haircut) in sovereign creditworthiness.

Main Methods:

  • Utilized Institutional Investor's index as a measure of country creditworthiness.
  • Employed the Synthetic Control Method to evaluate economic impacts.
  • Distinguished between commercial and official debt restructuring scenarios.

Main Results:

  • Restructuring with private creditors leads to reputational costs for the sovereign.
  • Sovereign defaults on official debt do not negatively affect creditworthiness and may even be beneficial.
  • Evidence suggests heterogeneity in the economic impact of debt restructurings.

Conclusions:

  • Official and private debt restructurings have distinct costs and consequences.
  • Countries may engage in selective defaults based on the type of debt restructured.
  • The findings highlight the importance of creditor type in sovereign debt management.