A behavioural approach to sovereign debt reschedulings

Abstract

An early-warning model which predicts the extent of sovereign debt reschedulings is developedusing the behavioural assumption thatindividuals (and governments) develop minimum consumption requirements. Sharp and unexpected falls in income and consumption can threaten these minimum requirements, thus foreshadowing the magnitude of sovereign debt reschedulings as government decision-makers choose to suspend full sovereign debt servicing in order to avoid extreme marginal utility losses. This implication is empirically analysed using data for 88 countries.