Abstract:

      This paper highlights the role of multilateral creditors (i.e., the ECB, IMF, ESM etc.) and their preferred creditor status in explaining the sovereign default risk of peripheral euro area (EA) countries. Incorporating lessons from sovereign debt crises in general, and from the Greek debt restructuring in particular, we define the priority structure of sovereigns' creditors that is most relevant for peripheral EA countries in severe crisis episodes. This new priority structure of creditors, together with the contingent claims methodology, is then used to derive a set of sovereign credit risk indicators. In particular, the sovereign distance-to-default indicator, proposed in this paper (which includes both accounting metrics and market-based measures) aims to isolate sovereign credit risk by using information from the public sector balance sheets to build it up. Analyzing and comparing it with traditional market-based indicators of sovereign risk suggests that the measurement and predictive ability of credit risk measures can be vastly improved if we account for the changing composition of sovereigns' balance sheet risk based on creditors' seniority.

 Short bio:

        Dr. Manish K. Singh studies economics and finance at the Barcelona Graduate School of Economics and received his doctorate in economics (Specialization: International Economics) at the Department of Economic Theory, University of Barcelona. Before that he received  the B. Tech in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is a certified Financial Risk Manager (FRM) by GARP. Currently, he is working as Research Economist at the Finance Research Group, IGIDR. His main research interests are international finance, banking and sovereign default risk, fiscal imbalances, debt capital markets, and infrastructure financing. Besides his teaching and research, he also has a broad professional experience as a risk analyst for international bank and financial consulting companies.