Abstract: Venezuela’s incipient sovereign debt restructuring is likely to be difficult for a number of legal and diplomatic reasons. This article discusses three additional economic issues that will influence the success of any restructuring operation. First, we show that Venezuela’s total debt liabilities are not transparent and present evidence suggesting that available measures may be misleading as an indicator of the total debt-servicing cost. Second, we calculate that there are significant gains to re-profiling Venezuela’s debt and note that it is feasible for these gains to be realized if official debts are restructured in accordance with past practices. Third, we review data on Venezuela’s oil wealth and argue that it could be either a help or a hindrance to a successful debt restructuring.
Puzzling Correlations and When to Find Them: Sovereign Spreads and Inflation (2021) (JMP) (Draft)
Abstract: The paper explores a new novel pattern in correlations between default risk and currency depreciation risk. It uses data from secondary bond markets to proxy default and inflation risk for six developing countries. The default risk is proxied by using the yield from USD denominated bonds, and the currency depreciation risk is proxied by implied yield in exchange rate forwards between LCU and USD. When the results are compared to the ones found in previous studies, it shows that the positive co-movements between currency depreciation risk and default risk disappears in the short horizon, broadly defined as less than two years. These relations remain when doing robustness checks by using other measures for currency depreciation risk. I use the correlation curve for different maturities, to discipline a model that explores a new mechanism of the trade offs associated with inflation and investment. The model is used to evaluate welfare loss for Brazil between 1995 and 2010, and quantify underinvestment because inflation risks. Using the model, I also evaluate different policy proposals to combat inflation risk and reduce the ex-post temptation to inflate away debt.
Abstract: Statistics on sovereign debt are used for many purposes. In this paper, we argue that existing measurements of sovereign indebtedness are typically not well designed for any of these purposes. We focus on two issues. First, existing accounting frameworks are designed for a deterministic environment, while sovereign debt portfolios contain numerous explicit and implicit state contingencies. Flawed concepts are compounded by directions to debt compilers to map state contingent cashflow into deterministic flows in uninteresting ways. Second, as a result of widespread market incompleteness, the debtor country and its creditors can be expected to value the same cashflows differently. We review current accounting practice, point to measurement issues, and suggest some alternative measures that may be less susceptible to these critiques. We apply the result to data on Argentina since 2014.
Too Late to Fail: Political Economy in Default Decisions (2018)
Abstract: We study the relationship between political economy forces created by political turnover and government agents biased towards expenditure when they are in power and the incentives to both default and renegotiate. Same political economy forces that can drive a country to delay default can create incentives to delay renegotiations. The basic idea is that the government in power faces a higher turnover when in default than in non-default times, which cause them to try to postpone default since they discount those states of the world more. Furthermore, once they do default, the government can fall into poverty trap and delay renegotiation, since it carries a cost. The welfare and policy implications are not clear since political economy buys ex-ante credibility, but ex post inefficiencies.
Works in Progress
Fear and Lending in Sovereign Debt: The Role of Risk Premia in Default and Renegotiations (2021) Slides
Inflation and Domestic Default: A Redistribution Story (2020)
Is Cash King? : Cash vs Accrual in Balance of Payment data (2020) With Mark Wright
Currency as Repression (2019)
Our paper seeks to explain why the college wage premium first rises and then falls after emerging countries liberalize trade. We study a two-sector trade model with heterogeneous firms and human capital accumulation. From the firms’ side, our model has two sectors: the first, a perfectly competitive sector, the second, monopolistically competitive sector selling differentiated goods. The monopolistically competitive sector is more skill intensive. In the model, households are grouped in a family structure where they are endowed with two types of labor, low-skilled and high-skilled.Households can choose to invest in human capital, in which case they pay an endogenous tuition cost and forgo wages earned from working in a low-skilled occupation for that period. When a country liberalizes trade the homogeneous sector is perfectly traded and therefore maintains its autarky size. At the same time, trade expands the market for the monopolistically competitive sector, which has transitory effects on the skill premium. Using Mexican data starting in the late 1980s, we show that the model can quantitatively account for the evolution of the skill premium.