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Market Sovereign Default and Haircuts: the Role of Expectations
1 : University of Paris-Saclay
* : Corresponding author
Université Paris-Sud - Université Paris-Saclay
We analyze the impact of haircuts– that is investors' losses, on the dynamics
of public debt ex-ante and ex-post default. Default is a market event. Ex-ante,
a low expected haircut is favorable to debt sustainability as it provides more
space to the government to face adverse macroeconomic shocks. Once default
occurs, the haircut must be high enough to ensure debt sustainability otherwise
the economy may potentially face serial defaults. This finding is supported by
the data.
