Assessing the Appropriate Size of Relief in Sovereign Debt Restructuring

This paper provides a methodology for assessing the appropriate size of debt relief in sovereign debt restructuring initiatives, with the baseline premise being that a restructuring must be principles based. We show how to... [ view full abstract ]

This paper provides a methodology for assessing the appropriate size of debt relief in sovereign debt restructuring initiatives, with the baseline premise being that a restructuring must be principles based. We show how to calculate the amount of debt relief that restores sustainability with high probability. The amount of debt relief is deemed appropriate if it leads to an economically and politically feasible fixed point for the primary surplus to GDP ratio in a “high” percent of possible future states of nature. Economic feasibility is defined by natural economic constraints, and political feasibility is defined by the constraints imposed by the restructuring principles. We also provide evidence suggesting that sovereign debt restructuring relief amounts to date have been ’too little’.