Risk Management Optimization for Sovereign Debt Restructuring
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Andrea Consiglio
Abstract
Debt restructuring is one of the policy tools available for resolving sovereign debt crises and, while unorthodox, it is not uncommon. We propose a scenario analysis for debt sustainability and integrate it with scenario optimization for risk management in restructuring sovereign debt. The scenario dynamics of debt-to-GDP ratio are used to define a tail risk measure, termed conditional Debt-at-Risk. A multi-period stochastic programming model minimizes the expected cost of debt financing subject to risk limits. It provides an operational model to handle significant aspects of debt restructuring: it collects all debt issues in a common framework, and can include contingent claims, multiple currencies and step-up or linked contractual features. Alternative debt profiles – obtained by maturity rescheduling, interest payment concessions or nominal value haircuts – are analyzed for their expected cost-risk tradeoffs. With a suitable re-calculation of the efficient frontier, the risk of debt un-sustainability of alternative risk profiles can be ascertained with a given confidence level. The model is applied to Greece sovereign debt crisis analyzing the suitability of various proposals to restore debt sustainability.
Acknowledgments
The paper benefited from the comments of Brice Dupoyet, Martin Guzman and three anonymous referees, and discussions with Anna Gelpern and Ashoka Mody. Stavros Zenios is holder of a Marie Sklodowska-Curie fellowship (no. 655092).
Appendix
Model Variables and Data
The variables of the optimization model are given below for all n∈𝒩:
xn Vector of debt financing decisions at node n, with components xnj denoting the nominal amount borrowed at the nth node with j-th maturity, e.g. short-, medium- and longterm.
On Accounting variable of payments due at each node n based on borrowing decisions at nodes on the path leading to n.
Cn Accounting variable of total amount due at each node n at the end of the risk horizon. This is the cost variable and it sums up maturing debt, payments due to borrowing decisions at nodes on the path leading to n, and the market or book value of outstanding debt.
cn Cost variable expressed as a ratio to GDP.
sdn Accounting variable of stress debt.
ζ This variable is the Debt-at-Risk (DeaR).
The model input data are the following:
Dn The exogenous debt to be financed. Debt re-profiling changes the values of this parameter.
CFj(n, m) Cash flows at node n for debt with jth maturity issued at node m on the path to n.
Pj(n, m) State-dependent value of outstanding debt at node n at the end of the risk horizon, for debt with jth maturity issued at node m on the path to n. This parameter prices debt maturing past the risk horizon.
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©2015 by De Gruyter
Artikel in diesem Heft
- Frontmatter
- Symposia Articles
- Risk Management Optimization for Sovereign Debt Restructuring
- A No-Tribunal SDRM and the Means of Binding Creditors to the Terms of a Restructuring Plan
- Writing-Down Debt with Heterogeneous Creditors: Lock Laws and Late Swaps
- Mission Creep The Emerging Role of International Investment Agreements in Sovereign Debt Restructuring
- Governing Sovereign Debt Restructuring Through Regulatory Standards
- Debt and Macroeconomic Behavior: Austerity and Restructuring in an Age of Uncertainty
- Articles
- The Long March towards an International Legal Framework for Sovereign Debt Restructuring
- Sovereign Debt Restructuring: A Model-Law Approach
- The IMF Debt Sustainability Analysis: Issues and Problems
Artikel in diesem Heft
- Frontmatter
- Symposia Articles
- Risk Management Optimization for Sovereign Debt Restructuring
- A No-Tribunal SDRM and the Means of Binding Creditors to the Terms of a Restructuring Plan
- Writing-Down Debt with Heterogeneous Creditors: Lock Laws and Late Swaps
- Mission Creep The Emerging Role of International Investment Agreements in Sovereign Debt Restructuring
- Governing Sovereign Debt Restructuring Through Regulatory Standards
- Debt and Macroeconomic Behavior: Austerity and Restructuring in an Age of Uncertainty
- Articles
- The Long March towards an International Legal Framework for Sovereign Debt Restructuring
- Sovereign Debt Restructuring: A Model-Law Approach
- The IMF Debt Sustainability Analysis: Issues and Problems
