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.

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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.

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