Restructuring Sovereign Debts with Private Sector Creditors: Theory and Practice

This paper presents new empirical results on the di¤erences in sovereign debt restructuring outcomes across debtor countries in di¤erent regions, and at di¤erent levels of development. Focusing exclu-sively on debts owed to private creditors, it \u85nds that both the amount of time taken to complete a restructuring and the size of creditor losses are larger for low income countries, and in particular for Sub Saharan Africa. In addition, these same countries also exit default substantially more indebted than when they entered default. The paper then reviews recent theoretical research on the process of sovereign debt restructuring. It argues that while recent theory is capable of explaining the magnitude of delays observed in the data, it has less to say about which aspects of the the debt restructuring process lead to large increases in indebtedness for low income countries. This paper was prepared for the conference Sovereign Debt and the Financial Crisis: Will This Time be Di¤erent?held in Tunisia on 29th and 30th March 2010, and organized by the World Banks Economic Policy and Debt Department in cooperation with the African Development Bank. I thank without implicatin