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Sovereign CoCos and debt forgiveness

Juan Carlos Hatchondo, Leonardo Martinez, Yasin Kursat Önder (UGent) and Francisco Roch
(2025) JOURNAL OF MONETARY ECONOMICS.
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Abstract
We study a sovereign default model in which the government issues CoCos (contingent convertible bonds) that stipulate a suspension of debt payments upon a sizable increase of the global risk premium (and thus, of the government’s borrowing cost). We find that CoCos allow the government to smooth out the effects of risk-premium shocks on consumption, but they increase the default frequency. By suspending debt payments, CoCos imply higher debt levels and, thus, higher default probabilities after adverse shocks. We also study CoCos that, in addition to the payment suspension, stipulate debt forgiveness after adverse shocks. In contrast with no-forgiveness CoCos, debt-forgiveness CoCos reduce debt levels after adverse shocks, thereby reducing default probabilities. Debt-forgiveness CoCos also yield larger welfare gains.
Keywords
Sovereign default, CoCos, Debt relief, Reprofiling, Debt forgiveness

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MLA
Hatchondo, Juan Carlos, et al. “Sovereign CoCos and Debt Forgiveness.” JOURNAL OF MONETARY ECONOMICS, 2025, doi:10.1016/j.jmoneco.2025.103784.
APA
Hatchondo, J. C., Martinez, L., Önder, Y. K., & Roch, F. (2025). Sovereign CoCos and debt forgiveness. JOURNAL OF MONETARY ECONOMICS. https://doi.org/10.1016/j.jmoneco.2025.103784
Chicago author-date
Hatchondo, Juan Carlos, Leonardo Martinez, Yasin Kursat Önder, and Francisco Roch. 2025. “Sovereign CoCos and Debt Forgiveness.” JOURNAL OF MONETARY ECONOMICS. https://doi.org/10.1016/j.jmoneco.2025.103784.
Chicago author-date (all authors)
Hatchondo, Juan Carlos, Leonardo Martinez, Yasin Kursat Önder, and Francisco Roch. 2025. “Sovereign CoCos and Debt Forgiveness.” JOURNAL OF MONETARY ECONOMICS. doi:10.1016/j.jmoneco.2025.103784.
Vancouver
1.
Hatchondo JC, Martinez L, Önder YK, Roch F. Sovereign CoCos and debt forgiveness. JOURNAL OF MONETARY ECONOMICS. 2025;
IEEE
[1]
J. C. Hatchondo, L. Martinez, Y. K. Önder, and F. Roch, “Sovereign CoCos and debt forgiveness,” JOURNAL OF MONETARY ECONOMICS, 2025.
@article{01JW8M1Z650T7M4ZH8XDH9P57H,
  abstract     = {{We study a sovereign default model in which the government issues CoCos (contingent convertible bonds) that stipulate a suspension of debt payments upon a sizable increase of the global risk premium (and thus, of the government’s borrowing cost). We find that CoCos allow the government to smooth out the effects of risk-premium shocks on consumption, but they increase the default frequency. By suspending debt payments, CoCos imply higher debt levels and, thus, higher default probabilities after adverse shocks. We also study CoCos that, in addition to the payment suspension, stipulate debt forgiveness after adverse shocks. In contrast with no-forgiveness CoCos, debt-forgiveness CoCos reduce debt levels after adverse shocks, thereby reducing default probabilities. Debt-forgiveness CoCos also yield larger welfare gains.}},
  articleno    = {{103784}},
  author       = {{Hatchondo, Juan Carlos and Martinez, Leonardo and Önder, Yasin Kursat and Roch, Francisco}},
  issn         = {{0304-3932}},
  journal      = {{JOURNAL OF MONETARY ECONOMICS}},
  keywords     = {{Sovereign default,CoCos,Debt relief,Reprofiling,Debt forgiveness}},
  language     = {{eng}},
  pages        = {{16}},
  title        = {{Sovereign CoCos and debt forgiveness}},
  url          = {{http://doi.org/10.1016/j.jmoneco.2025.103784}},
  year         = {{2025}},
}
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