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Is to Forgive to Forget? Sovereign Risk in the Aftermath of a Default

Author

Listed:
  • Silvia Marchesi

    (University of Milano Bicocca, CefES and Centro Studi Luca D’Agliano)

  • Tania Masi
  • Pietro Bomprezzi

    (University of Milano Bicocca and CefES)

Abstract
We examine the link between sovereign defaults and credit risk, by taking into account the depth of a debt restructuring and by distinguishing between commercial and official debt. The focus is on debt restructuring events, which take place at the end of a default spell. We use a novel methodology (Jordà and Taylor 2016) to estimate the average treatment effect of a default episode on our outcome variables, agency ratings and bond yield spreads, accounting for the endogeneity of the default. Our results show that the average treatment effect on ratings is negative (and positive for bond spreads) up to seven years following a default, while the opposite holds for a default with official creditors. Our results are robust to using a panel analysis, which allows us to investigate on the importance of the (final) haircut size. Specifically, we and that the rating (spread) variation (increase) is larger for cases with deeper haircuts. Therefore, we and evidence that official and private defaults may have different costs and then induce selective defaults.

Suggested Citation

  • Silvia Marchesi & Tania Masi & Pietro Bomprezzi, 2021. "Is to Forgive to Forget? Sovereign Risk in the Aftermath of a Default," Development Working Papers 475, Centro Studi Luca d'Agliano, University of Milano.
    • Handle: RePEc:csl:devewp:475
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    References listed on IDEAS

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    More about this item

    Keywords

    Sovereign defaults; Haircut; Credit Rating Agencies; bond yield spreads; local projection;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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