Maturity and Repayment Structure of Sovereign Debt

This paper studies the maturity, timing and relative size of repayments for sovereign debt. Using Bloomberg bond data for emerging economies, we document that sovereigns issue debt with shorter maturity but more back-loaded repayments during downturns. To account for this pattern, we study a sovereign-default model of a small open economy which issues a state-uncontingent bond, with a flexible choice of maturity and repayment schedule. In our model, as in the data, during recessions the country prefers its payments to be more back- loaded—delaying relatively larger payments—in order to smooth consumption. However, such back-loaded debt is expensive since payments scheduled later involve higher default risk. To reduce borrowing costs, the country optimally shortens its maturity. We calibrate the model to yearly Brazilian data. The model can rationalize the observed patterns of maturity and repayment structure, as an optimal trade-off between consumption smoothing and endogenous borrowing cost due to lack of enforcement.