DID YOU KNOW? HAIRCUT

In the world of finance, a 'haircut' isn't about trimming your locks. It refers to the reduction in the value of debt that creditors agree to accept when there's a default. When a sovereign debt haircut is implemented, bondholders and other creditors agree to accept a lower repayment amount than the face value of the debt. This reduction can be expressed as a percentage, for example a 20% ‘haircut’.

Sovereign debt haircuts are often employed as part of debt restructuring or debt relief programmes. They are typically negotiated between the debtor country and its creditors, including international financial institutions, other governments, or private investors. The objective is to make the debt load more sustainable and affordable for the debtor nation.

A sovereign debt haircut can be voluntary or involuntary, depending on the circumstances. In a voluntary haircut, bondholders or creditors agree to the reduction willingly through negotiations. In contrast, an involuntary or forced haircut may be imposed by the government or as part of a legal process, potentially through legislation or a court ruling.