Renegotiation after sovereign default: bygones no longer
Ling Feng, Dongsheng Jia, Xiaohan WangAbstract
In the aftermath of a sovereign default, debt recovery is determined through a restructuring process. Empirically, we show that the level of recovery is positively related to the level of defaulted debt. To rationalize this strong association, we build a framework that employs the Kalai-Smorodinsky bargaining solution in a model of sovereign debt renegotiation while jointly matching standard emerging market behavior. We identify the key assumptions that enable the model to match the data. We also show that the model using a standard Nash bargaining protocol results in debt recovery being unrelated to the outstanding level of debt. Two debt relief programs are then studied to highlight the difference between the two models in welfare implications.