Risk Management Optimization for Sovereign Debt Restructuring

  • Andrea Consiglio, Stavros A. Zenios
  • Journal of Globalization and Development, January 2015, De Gruyter
  • DOI: 10.1515/jgd-2015-0015

Risk management for sovereign debt restructuring

What is it about?

This is the first of three papers that, collectively, do three things: (1) Argue that debt restructuring should take a risk management perspective, and introduce the risk measures of Debt-at-Risk (DEaR) and Conditional-Debt-at-Risk (CDEaR) based on measures commonly used by financial institutions and their regulators, (2) Develop a model for optimally re-profiling a debt structure, and (3) Discuss the financial innovation of sovereign contingent debt with potential standstill. The Greek sovereign debt is used as a case study. We identified that debt was unsustainable before the IMF revised its projections in June 2015, and also show how sustainability can be restored with debt rescheduling and/or using sovereign contingent debt.

Why is it important?

On May 2013, the International Monetary Fund issued a public notice that it was reviewing the Fund's legal and policy framework for sovereign debt restructuring. In September 2014 the U.N. General Assembly adopted a resolution to ``negotiate and adopt a multilateral legal framework for sovereign debt restructuring". The heightened interest is prompted by the realization by the IMF that ``debt restructurings have often been too little and too late thus failing to re-establish debt sustainability and market access in a durable way''. The litigation against Argentina in New York courts by holdouts is having significant ramifications for future restructurings. This paper and the two follow-ups contribute some analytical constructive models to these debates.


Stavros Zenios
University of Cyprus

Motivation came from the Harvard Business Law Review: “Need for development of criteria for “optimal” debt restructuring process.” (Wright 2012) Was very pleased to see the paper published in the special journal issue edited by Joe Stiglitz and his colleagues M. Guzman, D. Lombardi and J.A. Ocampoat at Columbia University.

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