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Partial Default Cristina Arellano, Xavier Mateos-Planas and Jose-Victor Rios-Rull Mpls Fed, Univ of Minnesota, Queen Mary University of London Macro Within and Across Borders NBER Summer Institute July 2013 Arellano, Mateos-Planas, Rios-Rull

  1. Partial Default Cristina Arellano, Xavier Mateos-Planas and Jose-Victor Rios-Rull Mpls Fed, Univ of Minnesota, Queen Mary University of London Macro Within and Across Borders NBER Summer Institute July 2013 Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 1 / 1

  2. Motivation Sovereign defaults are somewhat frequent in developing countries. Defaults are commonly thought as discrete events: country either repays or defaults on all its debt. (As if they filed for bankruptcy like people.) But defaults are very heterogeneous events. ▶ Some defaults have costly and lengthy resolutions. ▶ Others defaults are minor with fast resolutions. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 2 / 1

  3. Existing Theory Quantitative models of sovereign default have countries either repaying or defaulting in full. (Aguiar and Gopinath 2006, Arellano 2008). With countries restructuring all of its debt after default. (Yue 2010, Benjamin and Wright 2009, D’Erasmo 2012). Default as state contingent assets does not sit well with the evidence that default is costly. (Trade costs, Rose 2002; financial crises, Reinhart and Rogoff 2010; lawsuits and sanctions, Hatchondo & Martinez 2013). The theory is Non-Markovian. It requires coordination among existing and prospective lenders. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 3 / 1

  4. This paper We document the properties across heterogeneous sovereign defaults. . . Sovereign defaults are partial. 1 . . During defaults sovereigns continue to receive foreign credit. 2 . . Larger defaults in downturns. 3 We develop a Markovian model of partial default. ▶ The model promising for explaining the heterogeneity across defaults. ▶ The environment requires output loses when debt is in arrears, and partial recovery of those debts. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 4 / 1

  5. DATA Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 5 / 1

  6. Defaults in the Data Panel data for 99 developing countries from 1970-2010. Public debt data from World Development Indicators: debt in arrears and new loans. Default events from Standard & Poor and Trebesch and Cruces (2012). Debt in Arrears Partial Default= Debt Service + Debt in Arrears Debt in Arrears= Interest and principals due this period but in arrears. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 6 / 1

  7. Defaults in the Data: 1. Sovereign Default is Partial Def ault in Brazil 8 . 6 . e u D s t n e m 4 y . a P / t b e D 2 d . e t l u a f e D 0 1970 1980 1990 2000 2010 year Default events are associated with large arrears but default is partial Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 7 / 1

  8. Defaults in the Data: 1. Sovereign Default is Partial Defaults in Ecuador .8 Defaulted Debt / Payments Due .6 .4 .2 0 1970 1980 1990 2000 2010 year Defaults can be very small as in 2008. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 8 / 1

  9. 1. Sovereign Default is Partial Defaults in Indonesia .8 .6 Defaulted Debt / Payments Due .4 .2 0 1990 1995 2000 2005 2010 year Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 9 / 1

  10. Defaults in the Data: 1. Sovereign Default is Partial Def aults in Argentina 1 .8 Defaulted Debt / Payments Due .6 .4 .2 0 1970 1980 1990 2000 2010 year Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 10 / 1

  11. Defaults in the Data: 1. Sovereign Default is Partial Partial Def aults 1 MMR MMR MMR MMR MMR MMR MMR MMR MMR MMR SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SDN SRB SRB SRB SRB SRB SRB SRB SRB SRB SRB SRB SRB SRB LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR LBR ETH ETH ETH ETH ETH ETH ETH ETH ETH GNB GNB GNB GNB GNB GNB GNB GNB GNB GNB GNB GNB GNB GNB TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA TZA ZWE ZWE ZWE ZWE ZWE ZWE ZWE SLE SLE SLE SLE SLE SLE SLE SLE SLE SLE STP STP STP STP STP STP STP STP MOZ MOZ MOZ MOZ MOZ MOZ MOZ MOZ MOZ MOZ CAF SLE SLE NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC NIC ZMB ZMB ZMB ZMB ZMB ZMB ZMB ZMB ZMB ZMB ZMB ZMB ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR RUS RUS RUS RUS RUS RUS RUS 8 YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM YEM GIN GIN GIN GIN GIN GIN GIN GIN CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF CAF . MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG MDG AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO AGO GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY GUY COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG COG RWA VNM VNM VNM VNM VNM VNM VNM VNM VNM VNM VNM VNM VNM VNM PER PER PER PER PER PER PER PER PER PER PER PER PER PER PER ALB ALB ALB ALB ALB MRT MRT MRT MRT MRT MKD MKD MKD MKD MKD MKD BGR BGR BGR BGR BGR e GIN GIN GIN SLB SLB SLB SLB SLB SLB SLB SLB SLB SLB SLB RUS RUS RUS u ARG ARG ARG ARG ARG SLE SLE HTI HTI HTI HTI HTI HTI HTI HTI HTI HTI HTI HTI HTI CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV D TGO TGO TGO TGO TGO TGO TGO UGA UGA UGA UGA UGA UGA UGA UGA UGA UGA UGA UGA UGA UGA s 6 PAN PAN PAN PAN PAN PAN PAN PAN PAN PAN PAN PAN PAN PAN IDN GRD GRD t SYC SYC SYC . GTM n CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CIV CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR CMR e TGO TGO TGO TGO TGO GRD GRD m IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN IRN CRI CRI CRI CRI CRI CRI CRI CRI CRI CRI BFA BFA BFA BFA BFA BFA BFA BFA BFA BFA BFA BFA BFA BFA IDN PRY PRY PRY PRY PRY PRY PRY GAB GAB GAB GAB GAB GAB GAB GAB GAB JOR JOR JOR JOR JOR y ARG ARG ARG ARG ARG ARG ARG ARG ARG ARG ARG ARG a DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM DOM ECU ECU ECU ECU ECU ECU ECU ECU ECU ECU ECU ECU ECU ECU P HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND HND SEN SEN SEN SEN SEN MDA CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV CPV GAB GAB GAB GAB GAB GAB GAB GUY MDA 4 GMB GMB GMB GMB GMB MMR NGA NGA / MAR MAR MAR MAR MAR JAM JAM JAM JAM JAM JAM JAM . BOL BOL BOL BOL BOL BRA BRA BRA BRA BRA BRA BRA BRA BRA BRA BRA BRA MNG MNG MNG MNG t GTM IDN IDN b DMA DMA DMA CMR NER NER NER NER NER NER NER NER NER GHA BOL BOL BOL BOL BOL BOL BOL BOL BOL BOL BOL BOL e JAM KEN GHA D NGA NGA NGA NGA NGA NGA NGA NGA NGA NGA NGA JAM JAM JAM JAM JAM GHA MWI d UKR UKR UKR e 2 DOM ZWE ZWE ZWE ZWE ZWE ZWE ZWE ZWE ZWE ZWE ZWE VEN VEN VEN NGA t . l PAK PAK MWI ECU ECU u VEN VEN VEN VEN VEN VEN PRY PRY PHL PHL PHL PHL PHL PHL PHL PHL PHL PHL a KEN KEN KEN KEN KEN f e SEN SEN SEN SEN SEN SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV SLV VEN TUR TUR D MAR TGO BLZ BLZ SEN TUR ECU ECU MEX MEX MEX MEX MEX MEX MEX MEX MEX MMR VEN VEN PER PER PER JAM JAM ROM ROM ROM CHL CHL CHL CHL CHL CHL CHL CHL URY URY URY ROM URY URY URY VEN DZA DZA DZA DZA DZA DZA URY 0 1970 1980 1990 2000 2010 year Across all S&P default : countries default on average on 59% of what is due. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 11 / 1

  12. Defaults in Data: 2. Borrowing during Sovereign Default Defaults in Indonesia .8 .6 .4 .2 0 -.2 1990 1995 2000 2005 2010 year sdef/low Defaulted Debt / Payments Due New Loans / Payments Due During default countries continue to borrow Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 12 / 1

  13. Defaults in Data: 2. Borrowing during Sovereign Default Defaults Non Defaults .3 .4 .3 .2 Fraction Fraction .2 .1 .1 0 0 -.1 0 .1 .2 -.1 0 .1 .2 New Loans / GNI New Loans / GNI Countries get new loans during defaults almost as much as in normal times, Caveat: Data on new government loans contains many missing observations. Arellano, Mateos-Planas, Rios-Rull () Partial Default Macro · · · Borders 13 / 1

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