Sovereign Cocos and the Reprofiling of Debt Payments

Leonardo Martinez and Juan Hatchondo

No 1435, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government has lost market access. We quantify the eects of such cocos by comparing simulations of the cocos model with the ones obtained when the government issues non-contingent debt. We nd that cocos are more likely to mitigate sovereign risk and generate welfare gains when the suspension of payments is triggered by local shocks and accompanied by conditionality, and when cocos are complemented with scal rules. We also nd that it may be optimal to complement the reproling of debt payments with haircuts.

Date: 2017
New Economics Papers: this item is included in nep-dge
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