The structure of sovereign debt of developing countries has evolved over time from illiquid bank loans to liquid bonds. Before 1990, sovereign countries borrow mainly from commercial banks in the form of syndicated bank loans, which are often customized to the government needs and rarely traded. After 1990, sovereign countries start to borrow mainly in the form of sovereign bonds, which are highly standardized and liquid on the secondary market. This change in the sovereign debt structure is accompanied with a reduction in the renegotiation length. Restructuring of bank loans is prolonged, taking on average 9 years. In early 1990s, even longer renegotiations were expected when governments start to borrow in terms of bonds from a large number of diffused creditors. In reality, however, it takes only 1 year on average to restructure bonds defaulted upon after 1990.
It is of policy relevance to understand why bond debt has shorter delays than bank debt. Delays are inefficient: the government suffers from losing access to international financial markets and the creditors cannot realize investment gains. It has been widely argued that faster debt restructuring would have helped major borrowing countries recover from crisis and restore the momentum of growth at an earlier stage. It is also theoretically relevant to understand ex-post renegotiation outcomes of bank debt and bond debt. Different renegotiation outcomes have direct implications on ex-ante borrowing and default incentives of the government for bank debt and bond debt.
