Sovereign Default and Crisis Resolution Inaugural-Dissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaft (Dr. rer. pol.) Eingereicht am Fachbereich Wirtschaftswissenschaft der Freien Universität Berlin von: Diplom-Volkswirt Christoph Trebesch Geburtsort: Uccle (Brüssel), Belgien Juni 2011 Datum der Disputation: 07.01.2011 Erstgutachter: Prof. Dr. Helge Berger Lehrstuhl Geldtheorie und Geldpolitik Freie Universität Berlin Zweitgutachter: Prof. Dr. Henrik Enderlein Professor of Political Economy Hertie School of Governance ii Für meine Eltern iii Table of Contents 1. Introduction ................................................................................................................ 1 2. Sovereign Debt Disputes .......................................................................................... 11 2.1. Introduction .............................................................................................. 12 2.2. Analyzing Debt Crises: Previous Approaches ......................................... 14 2.3. The Index of Government Coerciveness .................................................. 15 2.4. Coding and Resulting Datasets ................................................................ 22 2.5. Results and Stylised Facts ........................................................................ 26 2.6. Explaining Government Coerciveness ..................................................... 30 2.7. Conclusion ............................................................................................... 33 References ......................................................................................................... 35 Appendix to Chapter 2 ...................................................................................... 41 3. Delays in Sovereign Debt Restructurings: The Role of Politics and Institutions ....................................................................... 47 3.1. Introduction .............................................................................................. 48 3.2. Theoretical Considerations ...................................................................... 50 3.3. The Database: Stylized Facts and Case Study Evidence ......................... 53 3.4. Empirical Strategy.................................................................................... 59 3.5. Estimation Results ................................................................................... 64 3.6. Conclusion ............................................................................................... 70 References ......................................................................................................... 80 Appendix 3A: The Database on Restructuring Delays ..................................... 86 Appendix 3B: Narratives on Pre-restructuring Litigation ................................. 90 Appendix 3C: Narratives on Creditor Holdouts................................................ 93 Appendix 3D: Narratives on Political Delay .................................................... 99 4. Inexcusable Sovereign Default .............................................................................. 110 4.1. Introduction ............................................................................................ 111 4.2. Measuring Debtor Coerciveness ............................................................ 114 4.3. Identification and Estimation ................................................................. 116 4.4. Data and Variables ................................................................................. 121 4.5. Results .................................................................................................... 125 4.6. Conclusion ............................................................................................. 134 References ....................................................................................................... 144 iv 5. Haircuts and Sovereign Borrowing ........................................................................ 149 5.1. Introduction ............................................................................................ 150 5.3. Haircut Estimates: Results and Stylized Facts ....................................... 157 5.4. Theoretical Considerations .................................................................... 160 5.5. Haircuts and Post-Restructuring Spreads: Data and Results ................. 161 5.6. Haircuts and Duration of Exclusion: Data and Results ......................... 167 5.7. Conclusion ............................................................................................. 172 References ....................................................................................................... 185 Appendix 5.A1: Case Selection and Sample................................................... 190 Appendix 5.A2: Data Sources and Data Quality ............................................ 192 Appendix 5.A3: Computation Methodology ................................................... 197 Appendix 5.A4: Complete List of Cases ......................................................... 220 References Cited in the Appendix ................................................................... 225 6. Deutsche Zusammenfassung .................................................................................. 229 v List of Figures Chapter 2 Figure 2.1: Index Design 16 Figure 2.2: The Coerciveness-Index over Time 27 Chapter 3 Figure 3.1: Restructurings Duration by Type of Creditor (Bank vs. Bond Debt) 54 Figure 3.2: Restructuring Processes over Time 55 Figure 3.3: Summary of the Case Study Evidence 57 Figure 3.4: Restructuring Delay and the Number of Creditors Involved 72 Chapter 4 Figure 4.1: Coercive Debt Policies and Credit to the Private Sector 127 Chapter 5 Figure 5.1: Haircuts and Deal Volumes over Time 174 Figure 5.2: Restructurings with and without Debt Reduction 174 Figure 5.3: Haircut Size and Post-Restructuring Spreads 175 Figure 5.4: Haircut Size and the Duration of Exclusion 176 Figure 5.5: Kaplan-Meier Survival Functions for Duration of Reaccess 176 Figure 5.A1: Sovereign Debt Restructurings with Private Creditors, 1950-2010 191 Figure 5.A2: Case Coverage across Main Sources 192 Figure 5.A3: Yield to Maturity on US Low-Grade Corporate Bonds 203 Figure 5.A4: Imputed Sovereign Discount Rates by Issuer Credit Ratings 206 Figure 5.A5: Imputed Discount Rates for Selected Countries 210 Figure 5.A6: Discount Rates Actually Used Each Year in Computing Haircuts 211 Figure 5.A7: Benchmarking Imputed Rates against Actual Exit Yields 212 Figure 5.A8: Benchmarking Imputed Rates against Secondary Mkt Yields: 1980s 213 Figure 5.A9: Sovereign Restructurings by Country 1970 - 2010 224 vi List of Tables Chapter 2 Table 2.1: Descriptive Statistics for each Sub-Indicator during Debt Crises 26 Table 2.2: Ranking Coerciveness by Country 28 Table 2.3: Particularly Coercive Cases 29 Table 2.4: Results on the Determinants of Coerciveness 32 Table 2.A1: Countries and Periods Covered (Year-by-Year Dataset) 41 Table 2.A2: Restructuring Deals Covered (Agreement-Based Dataset 42 Table 2.A3: Data and Information Sources for each Sub-Indicator 43 Table 2.A4: Correlation Matrix for the 9 Sub-Indicators 44 Table 2.A5: Recent Debt Restructuring Cases (agreement-based dataset) 45 Table 2.A6: Robustness Checks: Including Year / Region Fixed Effects 46 Chapter 3 Table 3.1: Sovereign Debt Restructuring Processes Covered in the Dataset 73 Table 3.2: Overview of the Case Study Evidence (Delay Narratives) 74 Table 3.3: Summary Statistics (Duration Analysis) 75 Table 3.4: Summary of Main Results 65 Table 3.5: Restructuring Duration - Macroeconomic Factors 76 Table 3.6: Restructuring Duration – Political Risk and Institutions 77 Table 3.7: Restructuring Duration – Creditor Characteristics 78 Table 3.8: Restructuring Duration - Robustness Checks 79 Chapter 4 Table 4.1: Emerging Market Countries Included in the Analysis 135 Table 4.2: List of Control Variables 136 Table 4.3: Main Results: Coercive Debt Policies and Foreign Credit 137 Table 4.4: Crisis-Subsample & Horserace of Default vs. Coerciveness 138 Table 4.5: Results for Individual Coercive Actions (9 Sub-Indicators) 139 Table 4.6: Instrumental Variable Estimations 140 Table 4.7: Results by Sector and Type of Debt 141 Table 4.8: Robustness Checks 142 Table 4.9: Results for Borrowing Costs (Loan by Loan) 143 Chapter 5 Table 5.1: Haircut Estimates by Type of Restructuring and Era 177 Table 5.2: Haircuts in Selected Recent Restructurings (1999-2007) 178 Table 5.3: Description of Data and Variables used in Estimations 179 Table 5.4: Main Results for Haircuts and Bond Spreads 180 Table 5.5: Robustness Checks for Haircuts and Bond Spreads 181 vii Table 5.6: Overview on Restructuring Cases and Reaccess Years 182 Table 5.7: Main Results for Haircuts and Years of Exclusion 183 Table 5.8: Robustness Analysis of Exclusion Duration 184 Table 5.A1: Overview of Sources as used in the Calculations 193 Table 5.A2: Data Quality Across Time 196 Table 5.A3: Regression of US Corporate Market Yields on the High-Yield Index 202 Table 5.A4: Statistics of the Sovereign minus Corporate Bond Yield Differential 205 Table 5.A5: Linear Projection of Moody’s on Institutional Investor Ratings 207 Table 5.A6: Sovereign Debt Restructurings 1970-2010 221 viii Acknowledgements This dissertation would have never been possible without the help and advice of my two supervisors, Helge Berger