meaningful comparison, the same discount rate must be applied to compute the NPV of the new bonds and the old (holdout) bonds. Both old and new bonds face the risk of another default in the future and they both benefit from the debt relief effect of the restructuring.

Haircuts are computed on a bond-by-bond basis. Because of the heterogeneous nature of the debt renegotiations, it is not possible to simplify the calculations by relying on a “representative bond.” Here we use information on a total of 1,134 defaulted sovereign bonds.<sup>25</sup> To compute aggregate haircuts for each restructuring event, we build a weighted average haircut across restructured bonds and use amounts outstanding for weighting purposes. To choose the discount rate , we follow Sturzenegger and Zettelmeyer (2006) and Cruces and Trebesch ii (2013) and use the “exit yield,” which is the secondary market yield of the new bonds that start trading tt rr after the restructuring. This rate reflects the expected risk of a future default on the new obligations, taking into account the success (or failure) of the restructuring that was just implemented. as well as existing liquidity conditions in that market, an issue we take up in Section 4. Whenever possible, we use the secondary market yield of country _i_ in the month after the exit from default, using the bond pricing data summarized in Section 4. For 32 debt restructurings, no market yield data were available, mostly in small countries and low-income countries with no liquid bonds trading in London and New York. In these cases, we use a “worst yield” approach, by using the highest bond yield observable among non-defaulted sovereigns in London or New York at that point in time as a proxy for the country’s own exit yield. Appendix C2 provides further details and shows robustness checks when using alternative discount rates. Among other checks, we apply a 10% flat rate to all deals, as well as a “risk-free” lower bound rate, by using the yield on UK or US long-term government bonds at the time of the restructuring.

To make the estimates as comparable as the data permit, we apply the same haircut computation approach across the entire 200-year span. The required simplifying assumptions are discussed in detail in Appendix C. The Appendix also discusses how we deal with the so-called “sinking fund” structure of many historical bonds, bond buyback options, gold and currency clauses, or country-break ups. Moreover, we show results for alternative haircut measures, in particular the face value (nominal reduction) haircuts and for the socalled “market haircut,” which compares the face value of the old debt to the present value of the new debt. In addition, we check the correlation between our haircut estimates and bond prices around the start of default. This is relevant because, as noted above, the corporate debt literature typically uses market prices at the default onset to estimate bond recovery rates. Taken together, we find that the haircut formula and the choice of the discount rate matter, in particular for the estimated means, but the overall picture and the dispersion of haircuts across space and time is similar, irrespective of the method used.

> 25 We have pricing data for only a subset of these defaulted bonds.

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