Sovereign Defaults: The Price of Haircuts

Transcription

1 Sovereign Defaults: The Price of Haircuts Juan Cruces Univ. Torcuato Di Tella Christoph Trebesch University of Munich and CESIfo Debt Crisis Conference, Reykjavik University,

2 INTRODUCTION 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 : 180 restructuring cases in 68 countries 2) We find indication that effects of defaults are increasing in Haircut size. Effects larger and last longer 2

3 3 NER MDA MAR UKR MAR YUG DOM NIC DOM PER HND GIN SEN GAB CUB NIC PAN GAB DOM TGO CUB BRA ZAF BLZ GRD YUG BRA PHL URY CHL PRY DZA CHL MEX NER HRV MDG PAK MWI CRI BRA MDG MWI MOZ TUR TUR TUR ECU LBR RUS ECU SEN MEX SEN MDG ROM RUS TTO PER ZAF PAN SVN MAR BRA YUG SDN URY BRA ZAF MDG TUR URY VEN URY CHL ARG PER CHL ROM PHL ARG MEX SEN PAK ROM MEX NIC GMB YUG DZA ECU BOL MKD CRI CHL CUB NIC BIH ECU JOR URY BOL GUY VNM NIC MOZ GUY CRI UKR TZA RUS MEX ZMB NER BRA YEM CIV 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 Haircut in % 1975m1 1980m1 1985m1 1990m1 1995m1 2000m1 2005m1 HAIRCUTS IN 180 RESTRUCTURINGS

4 HAIRCUTS : DESCRIPTIVES Obs. Mean Std. Dev. Min Max By Type of Estimate Sturzenegger Zettelmeyer Haircut ("preferred") Market Haircut Write Off (of Face Value) By Type of Creditor Bank Debt Restructuring Bond Debt Restructuring Rescheduling vs. Debt Reduction Rescheduling Only With Reduction in Face Value By Era Pre-Brady ( ) Brady Era ( ) Post-Brady (since 1998)

5 TWO HYPOTHESES Higher haircuts are associated with 1) Higher borrowing costs later Bond Spreads 2) Longer periods of market exclusion Duration until re-access Negotiations Restructuring Haircut in % Yield Spreads? Exclusion Time? t-2 t-1 t+1 t+ Default 5

6 1) HAIRCUTS AND BORROWING COSTS Dependent variable: EMBI / EMBIG stripped yield spread over 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) obs. Explanatory variables : Haircuts, Default Dummies, Debt/GDP, Budget Balance, Real Growth, Inflation, Political Risk, Reserves/Imports, High-Yield Spread, Credit Rating Residual. 6

7 HAIRCUTS AND POST-RESTRUCTURING SPREADS Mean stripped EMBIG spread differential between defaulters and non defaulters after restructuring for groups of countries (by haircut level) EMBIG Spread Years after restructuring 37% is the median H_SZ among defaulters All_defaulters_mean H<37% H>37% 7

8 HAIRCUTS AND POST-RESTRUCTURING SPREADS Lag between spread and time of restructuring DEFAULT DUMMY Coefficient & Std.Err. (1) Effect of default (bp) Coefficient & Std.Err. HAIRCUTS Effect of Mean_H (bp) Effect of SD_H (bp) Coeff. & SE on Default Dummy Coeff. & SE on Haircut Effect of Mean_H 1 year lag 263** *** (99.99) (2.15) (227.14) (3.93) (10% signif.) 2 year lag 151** *** (72.25) (1.79) (159.82) (3.22) 3 year lag ** (82.07) (1.87) (104.58) (2.68) 4&5 year lag ** ** 5.03*** 111 (63.68) (1.38) (73.49) (1.27) 6&7 year lag ** 7.42*** 163 (58.88) (1.41) (75.06) (1.68) N 5,369 5,369 4,269 (2) DEFAULT DUMMY AND HAIRCUTS (and controlling for all other determinants of spreads) (7) Effect of SD_H Adj. R Other controls: Year & country effects. US low-grade corp. Year & country effects. US low-grade corp. Yield. Year and country effects, US low-grade corp. yield, Debt/GDP, Budget Balance, Real Growth, Inflation, Political Risk, Reserves/Imports, High- Std. Errors: Robust, clustered on country in all specifications. Yield Spread, Credit Rating Residual Dependent variable: spread in basis points. Sample stats: Mean(H)=40%, St.Dev.(H)=22% 8

9 2) HAIRCUTS AND DURATION OF EXCLUSION 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, Semi parametric Cox proportional hazard model. 9

10 HAIRCUTS AND REACCES: EXCLUSION DURATION Kaplan-Meier Survival Functions for Duration of Reaccess 1.25 Proportion of countries still excluded All Defaulters Haircut > 50% Haircut < 50% Years of Exclusion 10

11 HAIRCUTS AND REACCES: EXCLUSION DURATION Higher H lowers probab. of reaccessing Haircut (SZ, in %) Credit Rating (Residual) 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) Plain With Sovereign Rating (1) (2) (3) (4) (5) (6) (7) *** *** *** *** *** *** *** (0.008) (0.008) (0.007) (0.008) (0.007) (0.008) (0.008) 0.068*** (0.024) With Political Risk (0.028) Population and GDP External Financing Conditions Country Fundamentals Full Model 0.774*** 0.826*** (0.206) (0.281) 0.414*** (0.102) (0.189) * (0.080) (0.143) ** * (0.044) (0.038) *** * (0.010) (0.012) Effect of a 1 percentage point rise in Haircut? e = -2.4% Std.Dev.(H) = 30% Effect = e x 30-1 = - 51% 50% lower chance of tapping markets in any given year All estimations have time and regional effects. Sample size: dep. on spec. 11

12 CONCLUSION 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 FREE LUNCH! NO FREE HAIRCUT! 12