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Take the Short Route: How to repay and restructure sovereign debt with multiple maturities

Author

Listed:
  • Manuel Amador

    (Federal Reserve Bank of Minneapolis)

  • Mark Aguiar

    (Princeton University)

Abstract
We address the question of whether and how a sovereign should reduce its external indebtedness when default is a significant possibility, with a particular focus on whether a sovereign should buy back or dilute existing long-term sovereign bonds. Our main finding is that when reduction of debt is optimal, the sovereign should remain passive in the long-term bond market during the deleveraging process, retiring long-term bonds as they mature but never actively issuing or buying back these bonds. The only active margin is the short-term bond market, which involves partial roll over of such debt. Any active maturity management, as will typically be required to address rollover crisis risk, will be delayed until the end of the deleveraging process. We also show that there exist a set of Pareto improving debt restructurings in which maturities are shortened; however, these cannot be implemented by trading in competitive secondary markets.

Suggested Citation

  • Manuel Amador & Mark Aguiar, 2014. "Take the Short Route: How to repay and restructure sovereign debt with multiple maturities," 2014 Meeting Papers 165, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:165
    as

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    References listed on IDEAS

    as
    1. Niepelt, Dirk, 2014. "Debt maturity without commitment," Journal of Monetary Economics, Elsevier, vol. 68(S), pages 37-54.
    2. Cristina Arellano & Ananth Ramanarayanan, 2012. "Default and the Maturity Structure in Sovereign Bonds," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 187-232.
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    10. Harold L. Cole & Timothy J. Kehoe, 2000. "Self-Fulfilling Debt Crises," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 67(1), pages 91-116.
    11. Guido Lorenzoni & Iván Werning, 2019. "Slow Moving Debt Crises," American Economic Review, American Economic Association, vol. 109(9), pages 3229-3263, September.
    12. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2013. "Crisis and Commitment: Inflation Credibility and the Vulnerability to Sovereign Debt Crises," Working Papers 2013-4, Princeton University. Economics Department..
    13. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 1105-1131.
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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