The Cost of Default: Private vs. Official Sovereign Debt Restructurings

51 Pages Posted: 27 Dec 2015 Last revised: 28 Dec 2015

See all articles by Silvia Marchesi

Silvia Marchesi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); University of Milan - Centro Studi Luca d'Agliano (LdA)

Date Written: December 26, 2015

Abstract

This paper studies the relationship between sovereign debt default and (short term) GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and official sovereign debt restructurings. Analyzing default episodes in 117 countries over the period 1975-2013, I find that, in the short term, defaults are correlated with significant contraction of output growth. Moreover, by controlling for both the occurrence and the magnitude of private and official defaults, I am able to detect a more lasting and negative link between default and growth (which eventually turns out to be positive but only for haircuts). In both cases I find evidence of a trade-off concerning the restructurings size. Higher haircuts, however, may have some benefits in the short-run, but in turn imply a negative stigma which lower growth over a longer period. Conversely, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run. Adopting an alternative specification, in which the dependent variable is a country's credit rating, I investigate whether variation in the borrowing costs (highly correlated with credit ratings) may be one of the channels behind the link between restructuring and growth. I find that, in the case of haircuts, an improvement in the borrowing conditions a few years after the restructuring may explain a growth recovery. For official restructurings the evidence is more mixed.

Keywords: Haircuts, Output losses, Sovereign defaults

JEL Classification: F34, G15, H63

Suggested Citation

Marchesi, Silvia, The Cost of Default: Private vs. Official Sovereign Debt Restructurings (December 26, 2015). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 320, Available at SSRN: https://ssrn.com/abstract=2708440 or http://dx.doi.org/10.2139/ssrn.2708440

Silvia Marchesi (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

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Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

University of Milan - Centro Studi Luca d'Agliano (LdA)

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Milano, Mi 20122
Italy

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