Thread by @JAndritzky

My analysis of 32 sovereign debt crises with J Schumacher @ECB has been published as @IMFnews working paper, comparing how bond investors fare in debt defaults over the long run.

What’ in it? THREAD 1/7

imf.org/en/Publication…

Point-in-time analyses like Cruses & Trebesch (2013) find that investors incur massive losses in sovereign debt restructuring of 40% of NPV on average. Our longer view also incorporates risk premia earned before a crisis & the recovery rally afterwards. What do we find? 2/7

First, aggregate returns 1996-2013 show that investors fare worse in countries suffering debt crises compared to the broad EM index. However, even in the three different crisis subsamples, bond values roughly doubled. 3/7

Second, investors in crisis countries yielded about the same long-run returns whether or not restructurings took place. Only in the short run, returns are lower for bonds undergoing reprofiling & face value cuts - but these differences are statistically insignificant! 4/7

It’s your investment strategy, stupid!

Third, the investment strategy itself is decisive. We show that “constrained” investors selling in crises fare worst. “Unconstrained” buy-and-hold strategies fare better, and “distress” investors buying in crises pocket stellar returns. 5/7

Our findings bolster the hypothesis that debt restructuring is not just a zero-sum wealth transfer from bondholders to taxpayers. Instead, by improving recovery prospects, they seem to also offer upside to creditors at least in the long run. 6/7

The policy implication is obvious: Debt restructuring as crisis resolution tool can be useful. Key is to make it work efficiently, such as through a mechanism for orderly debt restructuring at disposal - see my work with @LarsPFeld @DChr_ et al. 7/7 onlinelibrary.wiley.com/doi/full/10.11…