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Partial Default

Author

Listed:
  • Cristina Arellano
  • Xavier Mateos-Planas
  • José-Víctor Ríos-Rull

Abstract

In the data sovereign default is always partial and varies in its duration. Debt levels during default episodes initially increase and do not experience reductions upon resolution. This paper presents a theory of sovereign default that replicates these properties, which are absent in standard sovereign default theory. Partial default is a flexible way to raise funds as the sovereign chooses its intensity and duration. Partial default is also costly because it amplifies debt crises as the defaulted debt accumulates and interest rate spreads increase. This theory is capable of rationalizing the large heterogeneity in partial default, its comovements with spreads, debt levels, and output, and the dynamics of debt during default episodes. In our theory, as in the data, debt grows during default episodes, and large defaults are longer, and associated with higher interest rate spreads, higher debt levels, and deeper recessions.

Suggested Citation

  • Cristina Arellano & Xavier Mateos-Planas & José-Víctor Ríos-Rull, . "Partial Default," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:589
    DOI: 10.21034/sr.589
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Emerging markets; Default episodes; Debt restructuring; Debt crises; Sovereign risk;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • G01 - Financial Economics - - General - - - Financial Crises

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