Toward a Common Methodology for Restructuring Sovereign Domestic Debt

The paper develops an approach to empirically estimate the Net Debt Relief (NDR) curve for sovereign domestic debt restructurings, a salient feature of those restructurings in recent decades, as described in normative terms in Grigorian (2023). The proposed empirical methodology builds on the stress-testing framework employed by the International Monetary Fund as part of the Financial Sector Assessment Programs, applying a combined sovereign and credit shocks. The paper lays the foundation for the toolkit for estimating the NDR curve, which could be useful for countries expected to undertake domestic debt restructurings in the future. It adds some features to the baseline treatment to mimic common regulatory treatments (i.e., risk weighting) and triggers for financial stress (e.g., deposit runs) to enhance the empirical relevance of the methodology. Finally, data from Pakistan and Egypt are used to test the methodology and draw lessons.