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: This paper examines the effects of an exogenous nominal exchange rate shock on the sovereign default intensive margin,  partial default, when monetary policy follows a peg and the sovereign carries a large share of external debt other than the anchor. I first document that the African Financial Community franc zones (CFA zones) have run a successful peg with the French franc and later the euro since 1945, while simultaneously accumulating a substantial stock of dollar-denominated debt. Empirical estimations show that an exogenous depreciation of the dollar with respect to the euro significantly increases sovereign default intensity in CFA zones by about 9%. To disentangle the effects of exogenous exchange rate shocks on consumption decisions, I built a structural model with unobserved heterogeneity across governments. Model results show that exogenous exchange rate depreciations increase current debt burden and consequently increase government incentives to partially default, regardless of productivity. Counterfactual analysis explore additional effects of nominal depreciation shocks through imported consumption and explain the importance of partial default in the transmission of nominal exchange rate shocks.