IMF Working Papers

Sovereign Cocos

By Juan Carlos Hatchondo, Leonardo Martinez, Kursat Onder, Francisco Roch

April 29, 2022

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Juan Carlos Hatchondo, Leonardo Martinez, Kursat Onder, and Francisco Roch. Sovereign Cocos, (USA: International Monetary Fund, 2022) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study a model of equilibrium sovereign default in which the government issues cocos (contingent convertible bonds) that stipulate a suspension of debt payments when the government faces liquidity shocks in the form of an increase of the bondholders' risk aversion. We find that in spite of reducing the frequency of defaults triggered by liquidity shocks, introducing cocos increases the overall default frequency. By mitigating concerns about liquidity, cocos make indebtedness and default risk more attractive for the government. In contrast, cocos that stipulate debt forgiveness when the government faces the shock, achieve larger welfare gains by reducing default risk.

Subject: Asset and liability management, Consumption, Contingent convertible capital, Debt default, Debt relief, External debt, Financial sector policy and analysis, National accounts, Return on investment

Keywords: Consumption, Contingent convertible capital, Debt default, Debt payment, Debt relief, Default frequency, Default risk, Global, Government issues coco, Haircuts., Liquidity shock, Maturity extensions, Reprofiling, Return on investment, Risk-premium shock, Sovereign Cocos

Publication Details

  • Pages:

    26

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2022/078

  • Stock No:

    WPIEA2022078

  • ISBN:

    9798400207648

  • ISSN:

    1018-5941

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