Scientific Sense ® Prof. Carmen Reinhart of Harvard on Sovereign Debt
Oct 1, 2025
Prof. Carmen Reinhart, a prominent Harvard economist and former Chief Economist at the World Bank, dives deep into sovereign debt dynamics. She contrasts high-yield corporate bonds with emerging-market sovereign debt, highlighting shared risk behaviors. Reinhart reveals the complexities of sovereign defaults versus corporate restructurings and discusses the historical average losses from defaults. She also examines China’s role as a selective lender and the socio-economic impacts of defaults, emphasizing their dire effects on GDP and health.
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Sovereign And Corporate Bonds Move Together
- High-yield emerging market sovereign bonds often behave like high-yield US corporate bonds during global risk-on/risk-off cycles.
- Global shocks (monetary tightening, COVID, GFC) trigger correlated withdrawals from both asset classes.
Sovereign Defaults Take Much Longer
- Sovereign restructurings are typically longer and more uncertain than corporate restructurings.
- Sovereigns frequently undergo serial restructuring, making outcomes and recovery timings unpredictable.
Haircut Distribution Is Remarkably Stable
- Average creditor haircuts in sovereign restructurings have stayed roughly stable over two centuries at about 45%.
- The distribution of haircuts is wide and persistent, with rare very large and many modest losses.
