Identifying Sovereign Defaults

Chapter 1 examines the key concepts used throughout the book. This chapter discusses why the notion of “creditworthiness” is better suited than those of “solvency” and “bankruptcy” for explaining sovereign risk and goes on to show that the risk of sovereign default depends on the country’s ability and willingness to pay. Next, Chap. 1 investigates the various policies that a borrowing state may implement to alleviate its debt burden. These policies include repudiation, missed payment, moratorium, unilateral and negotiated restructuring, exchange control, and special tax on bonds. Debt repudiation has historically put creditors in serious jeopardy (e.g., Mexico in the last third of the nineteenth century and Russia in the aftermath of the Bolshevik revolution). Yet forced debt restructurings, lengthy renegotiations, and negotiated restructurings – especially when influenced by political factors – have also led to heavy losses for creditors. Even though it is not tantamount to default, monetary erosion is another major threat to debtholders.