Sovereign Defaults: The Price of Haircuts

By J. Cruces, Christoph Trebesch. Social Science Research Network, 2011

562 citations recorded by the source corpus.

A main puzzle in the sovereign debt literature is that defaults have only minor effects on subsequent borrowing costs and access to credit. This paper comes to a different conclusion. We construct the first complete database of investor losses (\"haircuts\") in all restructurings with foreign banks and bondholders from 1970 until 2010, covering 180 cases in 68 countries. We then show that restructurings involving higher haircuts are associated with significantly higher subsequent bond yield spreads and longer periods of capital market exclusion. The results cast doubt on the widespread belief that credit markets \"forgive and forget.\".

Subfields: Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/f68879dec2dd3e1a68c519e9deed87b7fa5e7457

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Citations in the corpus

The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises (2016, unknown): “If an interior solution does not exist, bθ σ i , T̂i, and b π in (14) are replaced with 1, e T σ i , e π σ i , and the default condition reads:”
Sovereign Debt Restructurings: Preemptive or Post-Default (2015, methodology): “Please see the appendix of Cruces and Trebesch (2013) for a list of cases not included, such as Cuba, Liberia or Sudan, which have been in continuous default with no debt exchange since the 1980s.”
Self-Fulfilling Debt Crises: A Quantitative Analysis (2019, result): “We fix σ to 2, and ψ to 0.05, a value that implies an average exclusion from capital markets of 5.1 years following a default, in line with the evidence in Cruces and Trebesch (2013).”
Systemic Banking Crises Database II (2013, unknown): “We also date episodes of sovereign debt default and restructuring by relying on information from Beim and Calomiris (2001), World Bank (2002), Sturzenegger and Zettelmeyer (2006), IMF Staff reports, Cruces and Trebesch (2013), and reports from rating agencies and the media.”
Local Currency Sovereign Risk (2013, unknown): “In addition, we also perform a historical calibration of depreciation upon default using ex-post realized exchange rates over the 5-year horizon and historical default classifications by Reinhart and Rogoff (2008) and Cruces and Trebesch (2013). We show that the value of the currency in defaulting c”
Fiscal Rules and the Sovereign Default Premium (2022, unknown): “35 Cruces and Trebesch (2013) Duration of defaults ξ 0.”
Debt Dilution and Sovereign Default Risk (2011, unknown): “63 Cruces and Trebesch (2013) Minimum issuance price for long-term debt q .”
Banks, government Bonds, and Default: What do the data Say? (2014, methodology): “In Table AVII we focus on the haircut measure of the severity of default from Cruces and Trebesch (2013) and Zettelmeyer et al.”