Who Wins? The Political Economy of Sovereign Debt Restructuring Negotiations
Throughout history, sovereigns have relied on banks, bondholders, other countries, and international institutions, to fund a plethora of foreign and domestic policy objectives. Today, sovereign debt makes up almost 20 percent of global financial assets and has risen to 200 percent of global GDP. For this reason, research in political science and economics has centered on explaining when sovereigns repay their debts and when they default. Most of these “defaults” that are theorized in the empirical and game-theoretic literature, are not refusals to pay but attempts to restructure the terms of the initial loan agreement. I argue that both debtors and creditors know that sovereign debt contracts are not absolutes; they are semi-flexible arrangements that may need to be rewritten to account for changes in the state of the world. This implies that a sovereign’s decision is more than a choice over whether or not to default, but also a political choice over the amount of adjustment the populace can bear. I explain how sovereign debt is restructured and develop coherent theories about the political dynamics of the debt restructuring process.
This book analyzes the debt restructuring process as a bargaining game over the size of creditor concessions, or “haircuts. ” It emphasizes the dilemma that indebted governments face in financial crises, and their conflicting incentives to hide economic distress from citizens and plead economic distress to creditors. My political economy theory of sovereign debt restructuring yields novel predictions about negotiation behaviors, negotiation outcomes, and the political repercussions. I combine evidence from quantitative and qualitative sources and find that indebted governments can elicit larger creditor concessions, but at the expense of invoking domestic political punishment. Bargaining tactics that are domestically costly to the indebted government can be leveraged for preferable foreign policy outcomes.
My findings provide new and important insights into debt restructuring specifically, and the role of public opinion in international negotiations generally. Despite the resurgence of debt crises in advanced states, this project is among the first to explore the political determinants of continuous debt restructuring outcomes. By introducing new variation to the processes and outcomes of debt restructuring, I lay new groundwork for analyzing how debt crises are resolved. Additionally, I offer an international component to the economic voting literature where voters, rather than special interests, firms or legislatures, are at the heart of a government’s constraints. I demonstrate that leaders can strategically induce political costs that are born in equilibrium, in order to win concessions from their international negotiating partners. Contrary to the norm of secrecy in international negotiations, leaders go public not because of appeals to transparency or democratic idealism, but because economic voting costs can be strategically leveraged in a top-down signaling framework.
CATCH ME IF YOU CARE: WHEN INTERNATIONAL DEVELOPMENT ORGANIZATIONS PUNISH NATIONAL CORRUPTION (with Emilie Hafner-Burton and Christina Schneider)
Abstract: International development organizations (IDOs) provide billions of dollars in aid to developing countries. Many have official criteria for aid selectivity, based on the idea that development aid is more effective in the absence of political corruption. There remains, however, substantial debate and conflicting evidence over whether donors are actually responsive to allegations of corruption in potential recipient states. We argue that the extent to which corruption factors into IDO allocation rules and decisions depends on the composition of the donors within these organizations. Using newly collected data on anti- corruption mandates, alongside existing data on aid flows for the period of 1998-2013, we demonstrate that organizations composed of highly corrupted donors are just as likely to adopt—but generally less likely to enforce—anti-corruption mandates than are organizations composed of more honest donors, who follow the rules and punish corruption. Moreover, the composition of donor characteristics tends to matter more for aid allocation decisions than the strategic considerations commonly cited in the literature. The implications are substantial because the economic prosperity of much of the developing world is concerned. They also speak more broadly to the question of whether international efforts to institutionalize “good governance” standards are sincere or cheap talk.
PUBLIC DECLARATIONS: THE POLITICAL ECONOMY OF SOVEREIGN DEBT RESTRUCTURING NEGOTIATIONS
Abstract: Negotiations to restructure sovereign debt are protracted affairs, often lasting years or even decades. The resulting settlements to these negotiations, widely known as "haircuts," range from no concessions to reductions in payments of greater than 80 percent. Haircuts minimize domestic austerity, often at the expense of longer capital market exclusion, yet economic fundamentals do not predict the size of the haircut imposed on creditors very well. I analyze how the interactions between governments, their citizens, and private creditors during debt restructuring negotiations explain the size of haircut outcomes. I argue that the government’s political will to repay foreign debt is unobservable, private information for which the political leadership normally has incentives to misrepresent. Not only do governments have incentives to plead distress to lenders, they normally have reasons to hide their true economic distress from voters who will punish a government for financial mismanagement. Governments that lack the political will to repay however, can convey their "type" by publicly signaling their distress and invoking political punishment. This electorally costly signal separates governments that are politically unwilling to repay from those that are and extorts greater concessions – bigger haircuts – from creditors as a result. Using data on creditor haircuts and public default declarations for 25 defaulting countries from 1980-2009, I find that public signals of debt distress elicit larger creditor haircuts. Yet, what prevents all indebted governments from using a public strategy? As a further test of the mechanism, I analyze the political determinants of issuing a public default declaration and find that governments rely on public declarations when they are sufficiently costly to convey credibility.
CONCENTRATED CLAIMS: THE ROLE OF CREDITOR HETEROGENEITY IN DEBT RESTRUCTURING NEGOTIATIONS
Abstract: How do indebted governments restructure their debts with private creditors? What explains the variation in indebted state negotiating tactics? Existing explanations of indebted state bargaining behavior in sovereign debt restructuring negotiations have focused on domestic political configurations and assumed a unanimous creditor group with homogeneous preferences. Yet, private creditors have different exposures, ties to borrowers, and roles in the international banking system. In this paper, I argue that because institutional norms dictate burden sharing between creditors, variation in creditor heterogeneity is an important determinant of indebted states’ bargaining tactics. When there are few credit holders with highly concentrated exposures, creditors have a strong incentive to coordinate amongst themselves. However, when debt is held by disperse creditors with small individual claims, each creditor is better equipped to hold out for full repayment. Where creditor dispersion makes coordination most difficult ex-ante, indebted governments can turn to politically costly and public declarations of debt distress as a focal point to draw reluctant holdouts into the fold. Using original data on creditor committee characteristics alongside existing data on public pronouncements of moratoriums for 25 defaulting countries on a yearly basis from 1980-2009, I find that governments are more likely to publicly announce default as the number of creditors involved in a restructuring increases. The findings imply that who the government is bargaining against matters for how they choose to bargain.
DOMESTIC AND INTERNATIONAL SOURCES OF OFFICIAL DEBT RELIEF
Abstract: What explains the variation in bilateral debt relief provision by official creditors? I build a theory that distinguishes between creditor-debtor relations with international implications and creditor-debtor relations with domestic implications. I argue that default can have important implications for key domestic constituents in the creditor country like the export and banking sectors. These actors have a strong incentive to pressure their government to provide relief. However, because debt relief is provided in a single interaction and in a low conditionality environment, it is unlikely to help creditors wield influence at the international bargaining table. Thus, creditor-debtor relations with domestic implications for key audiences should be more important in the allocation of official relief. I test this theory using data on all bilateral provisions of official debt relief by the US from 1999-2010 and find mixed results. Both international and domestic creditor-debtor relationships appear to be important such that debtor states with formal alliances and larger export markets for US goods are most likely to receive relief. The allocation of foreign aid is biased based on both international and domestic pressures.
WoRKS IN PROGRESS
CREDIBILITY, RISK, AND THE SOURCES OF SOVEREIGN DEBT (with Branislav Slantchev)
PRIVATE INTERESTS IN OFFICIAL DEBT RELIEF (with Heidi McNamara)