Abstract: In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Countries (HIPC) Initiative. The program provided a multilateral debt relief to assure sustainable debt levels. To obtain the relief, HIPC had to show a track record of institutional investments to improve institutional quality. In this paper, I analyze the effectiveness of the HIPC Initiative through the behavior of private lending markets after HIPC relief. I propose two proxies for institutional quality perceived by private investors: the amount of funds lent and the sovereign default on those loans. Using data from 30 HIPC in the Sub-Saharan African region, I find that receiving the relief is positively correlated with lending from private investors, and negatively correlated with sovereign default in private sector funds. Since default expectations are key determinants of lending decisions and countries could self-select into the HIPC Initiative, I build a structural sequential dynamic discrete choice model with multiple sequential choices that includes observed and unobserved heterogeneity. Agents raise funds from multilateral and private sources and decide on institutional investment, default or repayment, the type of default, and the optimal debt allocations. The model captures a reduction in sovereign default on private bonds as an explanation of the equilibrium increase in the bonds' level. Robust analyses describe the importance of the design of the relief program into institutional quality improvements.

Abstract: Sovereign default decisions occur both in the extensive margin (whether or not to default) and in the intensive margin (how much to default). This paper focuses on the latter and builds on a partial default structural model with endogenous intensive margin decisions. In particular, I consider a fixed exchange rate regime environment where all nominal depreciations happen exogenously, and countries can decide how much to optimally default on their sovereign debt (partial default). I calibrate the model to the African Financial Community (CFA) franc zones, where the domestic currencies have been pegged to a foreign currency since 1948 (first the French Franc and then the Euro) with only one domestic nominal devaluation. The model demonstrates that nominal depreciations increase the debt burden on the economy, resulting in a higher percentage of partial defaults, which aligns with empirical evidence. In addition, a robust analysis shows that the existence of a sovereign default intensive margin reduces negative welfare effects of nominal depreciations by about 25%.