sovereign debt relief and its aftermath

37 Pages·2016·1.2 MB·English

SOVEREIGN DEBT RELIEF AND ITS
AFTERMATH
CarmenM.Reinhart ChristophTrebesch
HarvardUniversity,KennedySchool UniversityofMunich
Abstract
Thispaperstudiessovereigndebtreliefinalong-termperspective.Wequantifythereliefachieved
throughdefaultandrestructuringintwodistinctsamples:1920–1939,focusingonthedefaultson
official(governmenttogovernment)debtinadvancedeconomiesafterWorldWarI;and1978–2010,
focusingonemergingmarketdebtcriseswithprivateexternalcreditors.Debtreliefwassubstantial
inbotheras,averaging21%ofGDPinthe1930sand16%ofGDPinrecentdecades.Wethenanalyze
theaftermathofdebtreliefandconductadifference-in-differencesanalysisaroundthesynchronous
wardebtdefaultsof1934andtheBakerandBradyinitiativesofthe1980s/1990s.Theeconomic
landscape of debtor countries improves significantly after debt relief operations, but only if these
involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate
reductions,arenotgenerallyfollowedbyhighereconomicgrowthorimprovedcreditratings.(JEL:
E6,F3,N0,H6)
1. Introduction
Should countries with a heavy debt burden and little prospect of repayment receive
debtforgiveness?Thisisanoldquestionwithmodernresonance.1 Despitethepolicy
relevance and controversy surrounding this issue, surprisingly little is known about
the characteristics and the economic impact of sovereign debt relief. The literature
TheeditorinchargeofthispaperwasFarbrizioZilibotti.
Acknowledgments: We would like to thank Michael Bordo, Josefin Meyer, Maurice Obstfeld, Vincent
Reinhart, and Ken Rogoff, the editor, two anonymous referees, and seminar participants at Columbia
University, Harvard University, the International Monetary Fund, and the University of Melbourne for
helpfulcommentsandsuggestions.MaximilianMandlandTakeshiTashiroprovidedexcellentresearch
assistance.
E-mail: [email protected](Reinhart); [email protected](Trebesch)
1. SeeAhamed(2010)foradiscussionoftherecurringinternationaldebatesondebtreliefduringthe
1920sand1930sandSachs(1990)andCline(1995)onthedebtoverhangdebateofthe1980sand1990s.
Inthecurrentcontext,theIMFemphaticallycalledforfurtherdebtreliefforGreece(FinancialTimes,5
May2015),whileLarrySummersarguedforadeepdebtreductionforwar-tornUkraine(Summers2015).
JournaloftheEuropeanEconomicAssociation February2016 14(1):215–251
(cid:2)c 2016bytheEuropeanEconomicAssociation DOI:10.1111/jeea.12166
216 JournaloftheEuropeanEconomicAssociation
hasmostlyfocusedontheoccurrenceofdebtcrises,butnotontheirresolution.2 We
contributetowardsfillingthisgapbystudyingtwo20thcenturyinstancesofdebtrelief
that encompassed a substantial number of countries. These include the protracted
debt overhangs in many advanced economies in the 1920s and 1930s and those of
developingcountriesinthe1980sandearly1990s.
Thepaperisorganizedaroundtwomaincontributions.Inthefirstpart,wedocument
the process and magnitude of debt relief achieved through default and restructuring
of external sovereign debt in 48 crisis spells. We focus, in particular, on the debt
overhang that resulted from World War I, which was dominated by official external
sovereign debt (i.e., debts owed to government creditors). This episode has been
largelymissedinpreviousempiricalresearch,whichhasalmostexclusivelyfocusedon
sovereigndefaultsonprivatecreditors.Itscomparativeobscurityisbafflinggiventhat
intergovernmentalwardebtswereregardedasoneofthecentraleconomicchallenges
atthetime(see,forexample,MoultonandPasvolsky1932).3Theofficialdebtoverhang
ofthe1930sisalsoreminiscentofthesituationinperipheryEuropetoday,wheremuch
ofthedebtsarenowalsointhehandsofofficialcreditors.4Moreover,itisnotablethat
theepisodeendedwithafullcancellationofthewardebt.
To analyze the 1930s defaults on official debts, we collect the details on official
lending and debt relief events in a large network of war-related loans owed by 18
advanceddebtorcountriestothetwomaincreditorcountriesduringWorldWarIand
the 1920s: the United States and the United Kingdom. We next compare this intra-
war episode to the better-documented emerging market (EM) debt crises of recent
decades.Theseweredominatedbydefaultsonprivatecreditors,notablyforeignbanks
and bondholders. For the modern sample, we rely on earlier estimates of haircuts in
middle-income emerging markets between 1978 and 2010. However, we are the first
to compute various measures of debt relief for a representative group of crises and
countries.5 Wealsodocumenttheprocessofcrisisresolutionindetail.
2. Recent work focusing on debt crisis resolution and renegotiation includes Benjamin and Wright
(2009),PitchfordandWright(2012),AguiarandAmador(2013),Hatchondoetal.(2014),Kaminskyand
Vega-Garcia(2014),andAsonumaandTrebesch(2016).Inaddition,asmallbodyofempiricalworkhas
shedlightonspecificdebtreliefepisodes,suchasthe16Bradydebtreductiondealsofthe1990s(Cline
1989;Rieffel2003;ArslanalpandHenry2005),orthedebtforgivenessforhighlyindebtedpoorcountries
(HIPCs)(DepretisChauvinandKraay2005,2007;Diasetal.2013).However,acomprehensivepicture
ondebtrelieffromtheperspectiveofmiddle-andhigh-incomedebtorcountriesismissing.SeeTomzand
Wright(2013)forasurvey.
3. EichengreenandPortes(1986,1990)andEichengreen(1992)studytheinterwardefaultsonexternal
debtowedtoprivateforeignbondholders.
4. ArslanalpandTsuda(2014)documentthesharpmigrationofperipherysovereigndebtfromprivate
topublichands.Theimportanceofofficialcreditorsisevenhigherifonetakesintoaccounttheholdings
ofcentralbanks.
5. SturzeneggerandZettelmeyer(2006,2008),BenjaminandWright(2009),andCrucesandTrebesch
(2013) estimate the scope of credit losses (“haircuts”) in past sovereign defaults from an investor’s
perspective. Sturzenegger and Zettelmeyer (2007) and Zettelmeyer et al. (2013) compute debt relief
toGDPforsevenrecentcrisisspells.
ReinhartandTrebesch SovereignDebtRelief 217
Our second contribution is to examine the economic performance of debtor
countriesduringandaftersovereigndebtreliefoperations.Theoryisambiguousasto
whetherdebtreliefisbeneficialornot.Krugman(1988),Sachs(1989),andObstfeld
and Rogoff (1996) emphasize the potential welfare benefits of forgiving debt in a
situationofdebtoverhang.Inthesemodels,bothcreditorsanddebtorscangainfroma
partialdebtwrite-down,sinceanexcessivedebtstockandtheprospectoflargefuture
debtrepaymentsactasataxondomesticinvestmentanddepressthepresentvalueof
claimsheldbyinvestors.6Onthisbasis,areductioninthedebtlevelshouldbefollowed
byaperiodofhighergrowth.7However,asubstantialrelatedliteraturesuggeststhata
defaultorrestructuringcancausereputationaldamageandtriggersanctionsandoutput
losses(e.g.,EatonandGersovitz1981;BulowandRogoff1989;ColeandKehoe1998;
Aguiar and Gopinath 2006; Arellano 2008). In addition, debt relief may reduce the
incentives to implement economic reforms (Easterly 2002), and debt renegotiations
can give rise to collective action problems and inefficient delays that reduce output
(Benjamin and Wright 2009; Pitchford and Wright 2012). Determining the overall
(net)impactofdebtreliefis,intheend,anempiricalquestion.8
We study the aftermath of debt relief by tracing the evolution of real per capita
GDP,sovereigncreditratings,debtservicingcosts,andthelevelofgovernmentdebt
(externalandtotal)inaten-yearwindowaroundthereliefevent.9Wedescribestylized
factsfortheepisodesandrundifference-in-differences(DiD)regressionsbycomparing
theperformanceofcountriesthatreceiveddebtrelieftoacontrolgroupthatdidnot.
There are (at least) two challenges in assessing the impacts of debt relief—both
of which we address. First, the timing of debt relief may be endogenous, since
countries often renegotiate their debt only after they start to recover (Kovrijnykh
andSzentes2007;BenjaminandWright2009).Toaccountforthisconcern,webuild
on the identification strategy of Arslanalp and Henry (2005) and focus on episodes
of debt reduction that were centrally orchestrated and, thus, synchronously applied
across debtor countries, irrespective of their individual economic circumstances. In
theinterwaryears,twosuchepisodesemerge:theHooverMoratoriumof1931andthe
generalizedwardebtdefaultsofthesummerof1934,whichoccurredsimultaneously
inmorethan15debtorcountries.Inthemodernperiod,westressthetwodebtrelief
initiativesthatwerespearheadedbytheUnitedStates:(i)theBakerplanof1986,which
granteddebtreliefbyreducinginterestratesandbylengtheningthematurityofselected
developingcountrydebtsand(ii)theBradyinitiativeof1990,whichsetthestagefor
6. InAguiaretal.(2009),debtreliefcanbebeneficialforgovernmentswithlargedebtstocks,althoughit
isneveraParetoimprovementandnotnecessarilybeneficialforinvestors.InFernandezandMartin(2014),
creditorsbenefitfromadebtrestructuringifitisdesignedcorrectly.InSunder-Plassmann(2015),high
debtreliefisnotwelfareimproving,sinceitisassociatedwithhigherborrowingcostsandmorefrequent
defaultsinequilibrium.
7. Thispredictionisbroadlyinlinewiththeliteraturelinkingdebtandgrowth,whichhasestablisheda
negativecorrelationbetweenthelevelofpublicdebtandeconomicperformance.Thisliteratureissurveyed
inPanizzaandPresbitero(2013).
8. Thereisanascentliteraturestudyingtheeffectsofdebtreliefforhouseholds(DobbieandSong2015).
9. SeeTomzandWright(2007)forarelatedhistoricalstudyonsovereigndefaultandoutput.
218 JournaloftheEuropeanEconomicAssociation
face value debt reduction. These four events are useful for identification purposes,
sincedebtorcountriesdidnotchoosethetimingofreliefinanidiosyncraticmanner.
Theapproachalleviates,butdoesnotnecessarilyeliminate,potentialendogeneity.
Asecondchallengeinanalyzingthe“beforeandafter”ofdebtreliefisthepossible
roleofomittedvariablesandconfoundingfactors.Toaddressthis,weincludecountry
and time fixed effects, in line with the empirical strategy in Mian et al. (2014),
which takes care of any time-invariant variation and common trends. This approach
also accounts for global factors that might have influenced the dating choice of the
(synchronous)debtreliefevents.Finally,weaccountfortime-varyingconfoundersby
running a battery of robustness checks, in particular by adding controls for inflation,
banking crises, currency crises, wars and conflicts, and major political shocks. The
results are robust, but they should nevertheless be interpreted with caution as our
controlsarenotexhaustive.
Withthesecaveatsinmind,theevidenceisclearlyconsistentwiththenotionthat
debtreliefhasbeneficialeconomiceffectsfordebtorcountries.Wecansummarizethe
findingsasfollows.
Sovereigndebtreliefaveraged21%ofGDPand43%ofexternalgovernmentdebt
for advanced economies crises in the 1930s, and 16% of GDP and 36% of external
debt in middle/high-income emerging markets from 1978 to 2010. These estimates
represent a lower bound of the true magnitude of relief. The results for emerging
marketsarequitesimilartothoseofadvancedeconomies,andreliefestimatesarenot
clusteredinaparticularrange.Moregenerally,likeGourinchasandObstfeld(2012),
wefindstrikingparallelsinthecrisispatternsofthetwocountrygroups.
Regardingtheaftermathofdebtrelief,wefindthatpercapitaGDPincreases11%
and20%duringthefiveyearsfollowingdecisivedebtrelief,foremergingmarketsand
advancedeconomies,respectively.Decisiveherereferstothelastdebtreductionina
sequence,meaningthedebtoperationthatallowedcountriestoexitthedefault.10 We
also find a strong increase in average ratings for emerging markets. The Institutional
Investorrating(IIR)indeximprovesby21%aftertwoyearsfollowingadecisivedebt
relief operation, and 40% after five years. In contrast, for the interwar years, there
is no notable improvement in ratings. Regarding debt levels, we observe a strong
declinefollowingthecrisisexitinbothepisodes.Withinfiveyears,totalgovernment
debt/GDP falls by 27 percentage points across emerging market episodes and by 22
percentagepointsintheinterwarsample.Also,thedebtserviceburden(amortizations
plusinterestpayments)decreasesintheaftermathofdebtrelief,buttheaveragedecline
islesspronouncedthaninthedebtstocks.
Thesedescriptivefindingscallintoquestiontheoreticalmodelsthatassumecredit
events cast a long shadow. The DiD regressions amplify this message. The patterns
revealed by the data suggest that economic activity picks up following a debt relief
10. Inasignificantnumberofinstancesthereisonlyasinglerestructuring.However,therearenumerous
default spells where the number of restructurings ranges from two to eight. In the interwar years, the
“decisive”eventisthe1934summerdefault,whichwasfollowedbyacancellationofthewardebtsacross
Europe.
ReinhartandTrebesch SovereignDebtRelief 219
operation,withoneimportantcaveat:weonlyfindsignificantimprovementsingrowth
and ratings if the deal involves face value debt reductions. Rescheduling operations
with maturity extensions and interest reductions were not followed by a significant
improvementineconomicgrowth,oncewecontrolfortimeandcountryfixedeffects
andconductacounterfactualanalysis.Theregressionresultsalsopointtoasignificant
declineindebtstockstoGDPafterdecisivedebtrelief,buttheresultsarelessrobust
than with regard to growth and ratings. More surprisingly, we find no significant
correlation of debt relief and subsequent debt servicing burdens. The decline we
observeintherawdataseemstobeduetoacommontrendinborrowingcosts.
Thepaperproceedsasfollows.InSection2,wesummarizethecrisisanddebtrelief
experiencesofadvancedeconomiesandemergingmarketsthatarethemainfocusof
thepaper.InSection3,westudytheaftermathofdebtrelief,byshowingstylizedfacts
across all event spells, while in Section 4 we present the methodology and results of
ourDiDanalysis.InSection5,weconcludeanddiscussavenuesforfutureresearch.
2. Two Eras of Default and Relief: World War I Debts and Emerging Market
Crises
In this section, we introduce the restructuring and default episodes that are the
centerpiece of our study and compute the magnitudes of debt relief for each case.
In both eras, we focus on external debt, meaning debt that is predominantly (but
not exclusively) issued under foreign law, denominated in a foreign currency, and
held by non-residents. Our aim is to quantify the magnitude of external debt relief
oftheentiredebtcrisisspellineachcountry,ratherthanjustindividualrestructuring
agreements.
2.1. TheWorldWarIDebtOverhanganditsResolution
Forthe1920sand1930s,weconfineourattentiontoofficialWorldWarIdebt,where
boththeborrowerandthelendersweresovereigngovernments.Wardebtissomewhat
of a misnomer, since for most borrowers with the exception of the United Kingdom,
muchoftheofficialdebtwascontractedafterthewarhadendedandhadthecharacter
of reconstruction and stabilization loans.11 We focus, in particular, on official debts
owedtothetwomaincreditorsoftheinterwarperiod:theUnitedStates,whichwasthe
largest creditor and did not have outstanding debts to any other sovereign connected
with the war or its aftermath, and the United Kingdom, which also had lent large
amounts to other European countries and owed significant amounts to the United
States(seeMoultonandPasvolsky1932,foranoverview).
Whileourmainfocusisonthewardebtreliefeventsoftheearlyandmid-1930s,
and, in particular, the 1934 summer defaults and the subsequent debt cancellations,
11. SeeBailey(1950),Lloyd(1934),andUnitedStatesTreasury(1920,1933).
220 JournaloftheEuropeanEconomicAssociation
we document how the payment irregularities on the war debt began much earlier.
TableA.1inOnlineAppendixApresentsadetailedcountry-by-countrychronologyof
officialcrediteventsandrelatedmilestones.Itisevidentfromthesecountrytimelines
that the debt overhang episode was very protracted, spanning more than a decade.12
Thefirstdefaultsonthewardebtoccurredintheearly1920sandthesewerequickly
followedbyaseriesofreschedulingagreementswiththeUnitedStatesandtheUnited
Kingdom.
In chronological order, the United States rescheduled its war debt with Finland
(May1923),GreatBritain(June1923),Hungary(April1924),Lithuania(September
1924), Poland (November 1924), Belgium (August 1925), Latvia (September 1925),
Czechoslovakia (October 1925), Estonia (October 1925), Italy (November 1925),
Romania (December 1925), France (April 1926), Yugolsavia (May 1926), Greece
(May 1929), and Austria (May 1930). Similarly, the United Kingdom arranged debt
rescheduling settlements with Belgium (December 1925), Romania (1925), Italy
(January1926),France(July1926),Portugal(December1926),Greece(April1927),
andYugolsavia(August1927).
The terms of these agreements were favorable for debtor countries, since the
projected repayment periods were long, often exceeding 50 years, so that principal
would only extinguish in the mid-1980s. The (nominal) interest rates charged were
typicallyatorbelow3.5%ofprincipaloutstanding.Thedetailedtermsandrepayment
streamsofeachagreementweremainlygatheredfromtheoriginaldocumentsreprinted
in the authoritative study by Moulton and Pasvolsky (1932) and corroborated by
documentsfromtheUSTreasury(seeTableA.2intheOnlineAppendixfordetails).
In effect, the concessionary terms on the official war debt agreed in the crisis years
of the 1920s closely resemble the rescheduling terms of the Greek official debt in
2010. The restructured Greek debt to the European official institutions also features
repaymentperiodsabove30yearsandinterestratesaslowas2.5%(seeZettelmeyer
etal.2013).
After the rescheduling agreements of the mid- and end-1920s, most countries
continued to honor their scheduled interest and principal payments, at least partially.
ThisstateofaffairscametoanendwiththemoratoriumannouncedbyUSPresident
Hooveron20June1931,andapprovedby15creditoranddebtornationson6July1931.
Initially,Hoover’splanwastograntasuspensionofinterestandprincipalpaymentson
allinter-alliedwardebtsaswellasGermany’sreparationspaymentsforoneyear,i.e.
untillate1932.13However,attheendofthistemporarymoratoriumin1932,scheduled
paymentsdidnotresumeinuniformandregularfashion.WhiletheUnitedKingdom,
12. Thesameistrueforthedebtoverhangonnon–WorldWarIpublicandprivatedebts,whichstretched
intothepost–WorldWarIIera.Forexample,AustriaandGermanywereindefaultthrough1952;Italy
wasindefault1940–1945;GreeceandHungaryhadevenlongerstintsindefaultstatusthrough1964and
1967,respectively.SeeReinhartandRogoff(2009).
13. Forbrevity,wedonotdelveintothecomplexissueoftheGermanreparationdebts,whichhavebeen
studiedatlengthelsewhere.ThesedebtsoriginatedintheTreatyofVersaillesin1919,wererestructured
undertheDawesPlanin1924,restructuredagainundertheYoungPlanin1929,andultimatelydefaulted
onduring1932–1934(fordetailssee,e.g.,Ritschl2012).
ReinhartandTrebesch SovereignDebtRelief 221
Italy, Czechoslovakia, Finland, Greece, Latvia, Lithuania, Romania, and Yugoslavia
made the scheduled 15 December payment on war debt, France, Belgium, Poland,
Estonia and Hungary did not.14 In addition, the European countries suspended their
wardebtpaymentstotheUnitedKingdomaftertheLausannewardebtconferenceof
July1932,asdidAustraliaandNewZealand.
TherepaymentirregularitiescametoaheadinJune1934,withtheannouncementof
fullsuspensionofpayments.AlldebtorcountriesexceptFinland,whichfullyrepaid,
suspended all payments on the war debt owed to the United States and the United
Kingdom, and at various points in time removed this debt from their books.15 The
1934defaultscanthusbeinterpretedasadecisive“crisisexit”eventofthisperiod,in
the sense that it was understood that those debts would not be repaid anytime in the
foreseeablefuture.Inretrospect,thesummerdefaultsof1934thusbroughttoaclose
thewardebtoverhangepisodeofthe1920sand1930s,againstthestrongopposition
oftheUnitedStates.16
What was the scope of debt relief achieved through the 1934 defaults and debt
cancellations?Table1lists18countriesthat,asof1934,oweddebttotheUSandthe
UK governments from World War I and its aftermath (Australia, New Zealand, and
Portugal only owed debt to the United Kingdom). Finland, the only country to fully
honoritswardebtobligationstotheUnitedStates,willdropoutfromthedebtrelief
list.Toencompasstherangeof“creditevents”intheadvancedeconomiesatthattime,
we add to this list the default spell of Germany (which applied to all external debts,
affecting both private and public creditors) and the United States’ 1934 haircut that
resultedfromtheabrogationofthegoldclause,whichmostlyaffecteddomesticprivate
creditors(TableA.3inOnlineAppendixAprovidesthedetailsofthisepisode).This
bringsthetotalnumberof1930sepisodesto19.17
The first column of Table 1 gives the amount of debt outstanding plus interest
arrearsatthetimeofthegeneralizeddefaultinJune1934.Theseamountsowedtothe
United States and the United Kingdom vary somewhat across sources. For instance,
the unpaid obligations that are recorded in the United Nations 1948 publication,
Public Debt, 1914–1946, and in Baily (1950, p. 701) are not strictly the same as
those shown in Table 1, which are taken from the annual financial reports by the US
TreasuryDepartmentandfromtheMoody’sManualsonForeignSecurities(although
14. LeagueofNations,WorldEconomicSurvey1932/1933(p.332).
15. Somecountriesformallycanceledtheirdebtonlyyearsafter1934.Forexample,Franceremoved
theUKandUSwardebtfromitsbooksin1938.Others,suchasBelgiumandtheUnitedKingdom,kept
thewardebtintheirofficialdebtfiguresuntiltheendofWorldWarII.Nevertheless,in1934,itbecame
generallyrecognizedthatthewardebtswouldnotbeservicedforyearstocome.
16. InreactiontotheEuropeanpaymentsuspensions,theUSCongressenactedtheJohnsonDebtDefault
Actof1934,whichbannedUScitizensfromgrantingloanstocountriesthathaddefaultedontheirwar
debttotheUnitedStates.Moreover,theUSTreasurystillliststheunpaid1934wardebtobligationsinits
financialaccountstoday.
17. Inthevariousempiricalexercisesthatfollow,thesecountriesareincorporatedtotheextentthatthe
datapermit.Thecoreepisodeswiththemostcompleteprofileare:Austria,Belgium,France,Germany,
Greece,Italy,andtheUnitedKingdom.
222 JournaloftheEuropeanEconomicAssociation
bt
e
d
c
asbli
ngdom. Debtreliefexternalpu(6) 91.9––11.3–48.136.1–44.05.395.8–97.8–0.614.810.066.6
Ki of
d %
e
StatesandtheUnit GDP(in%) Presentvalue(lowerbound)(5) 19.525.111.52.7––––21.41.6–0.2––––––
otheUnited Debtreliefto acevalueperbound)(4) 24.552.236.44.1––––43.41.7–0.2–––6.210.510.3 d/GDP(US)17.6d/GDP(UK)28.6
t Fp e e
d u w w
e ( O O
w
o
eandpostwardebt otaltoUSandUK DebtoutstandingnUS$(w/arrears)(3) 4,714,345,2357,342,122,9723,133,049,808478,061,010243,356,167165,409,455208,197,822204,719,173132,174,14823,822,49219,511,4298,711,99613,658,4036,650,0802,086,096337,777,250110,966,57999,459,373
m T i
warti gs)
unpaidallied OwedtoUK ebtoutstandinUS$(w/arrear(2) –3,361,387,8611,123,494,77264,631,01017,107,8600146,572,822140,836,16799,384,80501,432,04506,222,619–0337,777,250110,966,57999,459,373 USGDP6,800,000,000UKGDP9,264,825,087
ults: Din 6 1
defa gs) US: UK:
The1934summer OwedtoUS DebtoutstandininUS$(w/arrear(1) 4,714,345,2353,980,735,1122,009,555,036413,430,000226,248,308165,409,45561,625,00063,883,00732,789,34423,822,49218,079,3838,711,9967,435,7846,650,0802,086,096000 Totalowedtothe11,734,806,327Totalowedtothe5,509,273,162 dixTableA.2.
1.LE aid) ms: Appen
TAB UnitedKingdomFranceItalyBelgiumPolandCzechoslovakiaYugoslaviaRomaniaGreeceAustriaEstoniaFinland(fullyrepLatviaLithuaniaHungaryAustraliaNewZealandPortugal Memorandumite Source:SeeOnline
ReinhartandTrebesch SovereignDebtRelief 223
allnumbersarequiteclose).Discrepanciesmayalsoarisefromtheexchangerateused
toconvertthedebtintolocalcurrency,toconstructameasureofdebtreliefrelativeto
GDP. Our point estimates of debt relief (column (4)) are based on the nominal GDP
and exchange rates shown in Online Appendix Table A.2, using 1934 values, since
thatyearuniformlydatesthe“dejure”debtreliefeventtowardstheUnitedStatesand
theUnitedKingdom.The1934dateisalsoappropriateforthedomesticdebtdefault
of the United States case, since the abrogation of the gold clause came into force
instantly.
Thesenumbersareaconservativeestimateofthetruescopeofthewardebtrelief
ofthe1930sfortwomainreasons.First,whenindoubtaboutthebestsourceondebt
amounts, exchange rates, or GDP, we have always opted for the values that would
yieldthemoreconservativeestimatesofdebtrelief.Second,andmoreimportantly,the
defaultsanddebtwrite-downsof1934werenotlimitedtodebtowedtheUnitedStates
andtheUnitedKingdom(whicharetheonlyoneswequantifyhere).Largeamounts
ofgovernmentaldebtwerealsoowedtoFrance,Italy,andBelgiumandtheseamounts
arenotpartofourcalculations.18
Methodologically, our preferred debt relief estimate for 1934 is simply the
outstandingfacevalueofwardebtsasashareofGDP,becausetheentiredebtstockwas
writtenoffandnonewdebtwasissued.Thisstandsincontrasttoalmostallemerging
marketdebtrestructurings,whichinvolvedanexchangeofoldloansorbondsagainst
newones.Asanalternative,however,wealsocomputeddebtreliefestimatesinpresent
value, based on the terms of the debt rescheduling agreements vis-a`-vis the United
Kingdom and the United States of the 1920s.19 To discount future payments in this
exercise, we use a 5% annual rate, which follows the approach chosen in Moulton
andPasvolsky(1932).Figure1showstheresultsandcomparesthemtoourbaseline
numbers, focusing on the seven largest debtor countries: Austria, Belgium, France,
Greece, Italy, Portugal, and the United Kingdom. Unsurprisingly, due to the long
remaining maturity of the rescheduled war debts, the present value relief estimates
areoftenconsiderablybelowthefacevalueestimates,especiallyforFranceandItaly.
Nevertheless, the magnitudes of debt relief are large with either method, exceeding
10% of GDP even in present value terms in most cases. Moreover, it should be kept
in mind that these war loans would have long fallen due before 1934 had this debt
notbeenrescheduledunderverygeneroustermsinthe1920s.Thepresentvaluerelief
estimatesfor1934arethereforeartificiallysmall,whilethefacevaluedebtreduction
amounts are a more appropriate assessment of the true scope of relief during this
period.
18. Belgium,France,andItalywereeachowedtotalwardebtsofmorethan$1bn1933USdollars(see
MoultonandPasvolsky1932).
19. WecouldnotgatherdetailsontheagreementsofAustraliaandNewZealand,andPortugalontheir
debtowedtotheUnitedKingdom.Wearethereforenotabletocomputepresentvaluedebtreliefestimates
forthesecases.
224 JournaloftheEuropeanEconomicAssociation
FIGURE 1. Debt relief of major European countries as a share of debtor country GDP in 1934.
FiguresareshownfordebtowedtotheUnitedStatesandtotheUnitedKingdomseparately.The
sourcesarethesameasinTable1.Thepresentvalueestimatesuseanannualdiscountrateof5%and
thecontractualdebtservicestreamsoftheoriginalagreementsasinMoultonandPasvolsky(1932).
2.2. ExternalSovereignDebtCrisesinEmergingMarketssince1978
Wenowturntoasecondsignificanteraofsovereigndebtreliefofthepast100years:
the defaults and restructurings of emerging market debts vis-a`-vis private creditors
(foreignbanksorbondholders).Ouranalysisisrestrictedtothemiddle-to-highincome
emergingmarkets.WerelyontheCrucesandTrebesch(2013)database,whichprovides
detailedinformationonthenear-universeofsovereigndebtrestructuringswithforeign
banksandbondholdersover1978–2010,includingdataontheamountofdebtaffected
aswellasestimatesonthesizeofcreditorlosses(haircuts)agreeduponineachdeal.
Their approach to estimate haircuts closely follows Sturzenegger and Zettelmeyer
(2006,2007,2008),whoestimateinvestorlossesforeightemergingmarketcrises.
Theinformationonhaircutsinindividualdebtrestructuringsallowsustocompute
acumulativehaircutmeasurefortheentiredefaultspell,thussummarizingtheoutcome