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American Economic Journal: Macroeconomics: Vol. 5 No. 3 (July 2013)

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Sovereign Defaults: The Price of Haircuts

Article Citation

Cruces, Juan J., and Christoph Trebesch. 2013. "Sovereign Defaults: The Price of Haircuts." American Economic Journal: Macroeconomics, 5(3): 85-117.

DOI: 10.1257/mac.5.3.85

Abstract

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."

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Authors

Cruces, Juan J. (U Torcuato Di Tella)
Trebesch, Christoph (U Munich)

JEL Classifications

E43: Interest Rates: Determination, Term Structure, and Effects
F34: International Lending and Debt Problems
G15: International Financial Markets
H63: National Debt; Debt Management; Sovereign Debt

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