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Journal of Globalization and Development

Ed. by Stiglitz, Joseph / Emran, M. Shahe / Guzman, Martin / Jayadev, Arjun / Ocampo, José Antonio / Rodrik, Dani

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Risk Management Optimization for Sovereign Debt Restructuring

Andrea Consiglio / Stavros A. Zenios
  • Corresponding author
  • University of Cyprus, Nicosia, Cyprus, Norwegian School of Economics, and Wharton Financial Institutions Center, University of Pennsylvania, USA
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Published Online: 2016-02-19 | DOI: https://doi.org/10.1515/jgd-2015-0015


Debt restructuring is one of the policy tools available for resolving sovereign debt crises and, while unorthodox, it is not uncommon. We propose a scenario analysis for debt sustainability and integrate it with scenario optimization for risk management in restructuring sovereign debt. The scenario dynamics of debt-to-GDP ratio are used to define a tail risk measure, termed conditional Debt-at-Risk. A multi-period stochastic programming model minimizes the expected cost of debt financing subject to risk limits. It provides an operational model to handle significant aspects of debt restructuring: it collects all debt issues in a common framework, and can include contingent claims, multiple currencies and step-up or linked contractual features. Alternative debt profiles – obtained by maturity rescheduling, interest payment concessions or nominal value haircuts – are analyzed for their expected cost-risk tradeoffs. With a suitable re-calculation of the efficient frontier, the risk of debt un-sustainability of alternative risk profiles can be ascertained with a given confidence level. The model is applied to Greece sovereign debt crisis analyzing the suitability of various proposals to restore debt sustainability.

Keywords: conditional Value-at-Risk; debt restructuring; Greek crisis; portfolio optimization; scenario analysis; sovereign debt; stochastic programming; Value-at-Risk


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About the article

Corresponding author: Stavros A. Zenios, University of Cyprus, Nicosia, Cyprus, Norwegian School of Economics, and Wharton Financial Institutions Center, University of Pennsylvania, USA, e-mail:

Published Online: 2016-02-19

Published in Print: 2015-12-01

Citation Information: Journal of Globalization and Development, Volume 6, Issue 2, Pages 181–213, ISSN (Online) 1948-1837, ISSN (Print) 2194-6353, DOI: https://doi.org/10.1515/jgd-2015-0015.

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