Sovereign Debt Restructuring: A Modest Proposal

  • Colin Ellis Visiting Research Fellow, University of Birmingham, United Kingdom
Keywords: sovereign default, debt-sustainability analysis, forecast evaluation


Many sovereigns, including weaker credits, have taken on substantial debt during the COVID-19 pandemic. This raises the prospect of future defaults and sovereign restructurings, which will be informed by debt-sustainability analysis. But when analyzing notable recent sovereign defaults, we find a pattern of serially correlated errors: the analysis at the time of the restructuring is too optimistic about future sovereign debt dynamics. In light of this, I propose that future sustainability analysis should be based on more pessimistic expectations. In turn, this implies that sovereign creditors should face larger losses in future restructurings.


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Cumulative default rates for different rating categories