Sovereign Defaults: The Price of Haircuts Juan Cruces Univ. - - PowerPoint PPT Presentation

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Sovereign Defaults: The Price of Haircuts Juan Cruces Univ. - - PowerPoint PPT Presentation

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Sovereign Defaults: The Price of Haircuts Juan Cruces Univ. Torcuato Di Tella Christoph Trebesch University of Munich and CESIfo Debt Crisis Conference, Reykjavik University, 08.10.2011 1 INTROD ODUCTION ON Theory predicts exclusion

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Sovereign Defaults: The Price of Haircuts

Juan Cruces

  • Univ. Torcuato Di Tella

Christoph Trebesch University of Munich and CESIfo

Debt Crisis Conference, Reykjavik University, 08.10.2011

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INTROD ODUCTION ON

  • Theory predicts exclusion from capital markets

(Eaton and Gersovitz 1981, Arellano 2008, Yue 2010)

  • But 30 years of empirical research finds small effects
  • Puzzle: Do markets really forgive and forget?
  • Our contribution

1) Compute “haircut” estimates 1970-2010: 180 restructuring cases in 68 countries 2) We find indication that effects of defaults are increasing in Haircut size. Effects “larger” and last longer

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3 NER MDA MAR UKR MAR NGA YUG DOM ZAR NIC DOM PER HND NGA NGA GIN SEN POL GAB POL CUB NIC PAN GAB ZAR DOM TGO CUB BRA ZAF BLZ POL GRD YUG BRA PHL URY CHL PRY DZA CHL MEX NER HRV MDG PAK MWI CRI JAM POL BRA MDG MWI MOZ ZAR TUR TUR TUR ECU LBR RUS POL JAM NGA ECU SEN ZAR MEX SEN MDG ROM RUS TTO PER ZAF PAN SVN MAR BRA YUG SDN URY JAM BRA ZAF MDG TUR JAM JAM URY VEN URY CHL ARG NGA PER JAM CHL ROM PHL ARG JAM MEX SEN PAK ROM MEX NIC NGA GMB YUG DZA ECU ZAR ZAR POL ZAR POL BOL MKD CRI CHL CUB NIC BIH ECU NGA JOR URY BOL GUY VNM NIC MOZ GUY CRI UKR TZA RUS MEX ZMB NER BRA YEM CIV POL CMR RUS BGR HND PAN ALB KEN SLE PER PHL TGO ETH BOL IRQ ARG MDA VEN ECU YUG ARG GIN PHL CMR DOM STP CO MEX UGA MRT

20 40 60 80 100 Haircut in % 1975m1 1980m1 1985m1 1990m1 1995m1 2000m1 2005m1

HAIRCUTS IN 180 R RESTRUCT CTURINGS

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Obs. Mean Std. Dev. Min Max Sturzenegger Zettelmeyer Haircut ("preferred") 180 37.04 27.28

  • 9.80

97.00 Market Haircut 180 40.01 27.02

  • 9.80

97.00 Write Off (of Face Value) 180 16.77 30.55 0.00 97.00 By Type of Estimate

HAIRC RCUTS 1970 1970-20 2010: 10: D DESCRI RIPTIVES

Bank Debt Restructuring 162 37.05 27.90

  • 9.80

97.00 Bond Debt Restructuring 18 36.97 21.60 4.70 76.80 Rescheduling vs. Debt Reduction Rescheduling Only 123 24.15 16.67

  • 9.80

73.20 With Reduction in Face Value 57 64.84 24.94

  • 8.30

97.00 Pre-Brady (1970-1989) 99 25.57 18.83

  • 9.80

92.70 Brady Era (1990-1997) 48 51.81 28.48 3.30 92.30 Post-Brady (since 1998) 33 49.96 31.30

  • 8.30

97.00 By Era By Type of Creditor

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TW TWO HY O HYPOT OTHES ESES ES

Higher haircuts are associated with 1) Higher borrowing costs later  Bond Spreads 2) Longer periods of market exclusion  Duration until re-access

Default t-2 t-1 Negotiations Restructuring  Haircut in n % t+1 t+… Yiel eld Spread eads ? Exclusion

  • n Time

me?

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  • Dependent variable: EMBI / EMBIG stripped yield spread
  • ver US Treasury.
  • Monthly panel regression with time and country fixed

effects.

  • Sample: all 47 countries in the EMBI/EMBIG index. (24

defaulters + 23 non defaulters) 1993-2010. 5000+ obs.

  • Explanatory variables : Haircuts, Default Dummies,

Debt/GDP, Budget Balance, Real Growth, Inflation, Political Risk, Reserves/Imports, High-Yield Spread, Credit Rating Residual.

1) HAI HAIRCU CUTS AN S AND BOR ORROWING COS COSTS TS

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100 200 300 400 500 600 700 800 1 2 3 4 5 6 7 EMBIG Spread Years after restructuring

Mean stripped EMBIG spread differential between defaulters and non defaulters after restructuring for groups of countries (by haircut level)

All_defaulters_mean H<37% H>37%

37% is the median H_SZ among defaulters

HAI HAIRCUTS AN S AND POS OST-RESTRUCT CTURING S G SPREADS

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8 Coefficient & Std.Err. Effect of default (bp) Coefficient & Std.Err. Effect of Mean_H (bp) Effect of SD_H (bp)

  • Coeff. & SE
  • n Default

Dummy

  • Coeff. & SE
  • n Haircut

Effect of Mean_H Effect of SD_H 1 year lag 263** 263 6.75*** 270 149 100 1.39 155 (99.99) (2.15) (227.14) (3.93) (10% signif.) 2 year lag 151** 151 4.73*** 189 104 107

  • 1.06

(72.25) (1.79) (159.82) (3.22) 3 year lag 104 3.89** 155 85

  • 124

3.22 (82.07) (1.87) (104.58) (2.68) 4&5 year lag 52 3.16** 127 70

  • 184**

5.03*** 111 (63.68) (1.38) (73.49) (1.27) 6&7 year lag

  • 56

0.80

  • 283**

7.42*** 163 (58.88) (1.41) (75.06) (1.68) N 5,369 5,369 4,269

  • Adj. R2

0.42 0.42 0.51

  • Std. Errors:

Year & country effects. US low-grade

  • corp. Yield.

DEFAULT DUMMY (1) HAIRCUTS (2) DEFAULT DUMMY AND HAIRCUTS (and controlling for all other determinants of spreads) (7) Lag between spread and time of restructuring Year and country effects, US low-grade corp. yield, Debt/GDP, Budget Balance, Real Growth, Inflation, Political Risk, Reserves/Imports, High- Yield Spread, Credit Rating Residual Other controls: Robust, clustered on country in all specifications. Year & country effects. US low-grade corp.

HAI HAIRCUTS AN TS AND POS OST-RESTRUCT CTURING S G SPREADS

Dependent variable: spread in basis points. Sample stats: Mean(H)=40%, St.Dev.(H)=22%

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  • Exclusion = Number of years between the end of a

restructuring and the first year of market access.

  • Primary market issuance (bond/loan on international

markets from Dealogic) and/or positive credit flows to the public sector (GDF data).

  • Robustness check “full access” (net inflows > 1% of

GDP).

  • Sample: 60 “final” restructurings, 56 countries, 1980-

2006.

  • Semi parametric Cox proportional hazard model.

2) 2) HAI HAIRCUTS AN TS AND DURATION OF OF EXCL CLUSI SION

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HAI HAIRCUTS AN TS AND REACC ACCES: ES: E EXCLU CLUSION D DURAT ATION

Kaplan-Meier Survival Functions for Duration of Reaccess

0.25 0.5 0.75 1 1.25 2 4 6 8 10 12 14

Years of Exclusion All Defaulters Haircut > 50% Haircut < 50%

Proportion of countries still excluded

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(1) (2) (3) (4) (5) (6) (7)

  • 0.037*** -0.034*** -0.031*** -0.027*** -0.032*** -0.034*** -0.024***

(0.008) (0.008) (0.007) (0.008) (0.007) (0.008) (0.008) 0.068*** (0.024) 0.037 (0.028) 0.774*** 0.826*** (0.206) (0.281) 0.414*** 0.159 (0.102) (0.189)

  • 0.132*

(0.080) 0.136 (0.143)

  • 0.094**
  • 0.071*

(0.044) (0.038)

  • 0.031***
  • 0.021*

(0.010) (0.012) Population and GDP Haircut (SZ, in %) Credit Rating (Residual) Plain With Sovereign Rating With Political Risk Political Risk (ICRG) GDP per capita (log) Population (log) High-yield bond spread US Treasury 10-year Bond Yield Primary Balance (in % to GDP) Public Debt (in % to GDP) External Financing Conditions Full Model Country Funda- mentals

HAI HAIRCUTS AN TS AND REACC ACCES: ES: E EXCLU CLUSION D DURAT ATION

All estimations have time and regional effects. Sample size: 322 – 237 dep. on spec. Effect of a 1 percentage point rise in Haircut? e-.024 -1 = -2.4% Std.Dev.(H) = 30% Effect = e-.024 x 30 - 1 =

  • 51%

50% lower chance of tapping markets in any given year Higher H lowers

  • probab. of

reaccessing

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CONCL CLUSION

  • 1. A one standard deviation higher Haircut is

associated with

  • a. 150 basis points higher spread in year 1,
  • b. 70 basis points higher in years 4 and 5,
  • c. 50% lower likelihood of re-accessing in any year.
  • 2. New support for reputational theories of sovereign

debt (Eaton and Gersovitz,1981).

NO NO F FRE REE LUNCH! UNCH! NO NO FRE REE E HA HAIRCUT!