Life after Default? Private vs. Official Sovereign Debt Restructurings

CENTRO STUDI LUCA D’AGLIANO DEVELOPMENT STUDIES WORKING PAPERS, No. 398, 2016

50 Pages Posted: 14 Jan 2017

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: January 12, 2017

Abstract

This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and official sovereign debt restructurings. Analyzing 73 default episodes in 117 countries over the period 1975-2013, I find that defaults are correlated with contraction of short-term output growth. Most importantly, controlling for the severity of the default, I am able to detect a more lasting and negative link between default and growth. While higher private haircuts imply a negative stigma which is associated to lower growth over a longer period, 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 find very similar results for private haircuts and official restructurings. They are both associated to lower ratings up to seven years after the default. To the extent that credit ratings is a good proxy for borrowing costs, positive growth prospects for official defaulters seem not to be influenced by a lower reputation in the credit markets.

Keywords: Haircuts, Output losses, Sovereign defaultsmma separated

JEL Classification: F34, G15, H63

Suggested Citation

Marchesi, Silvia, Life after Default? Private vs. Official Sovereign Debt Restructurings (January 12, 2017). CENTRO STUDI LUCA D’AGLIANO DEVELOPMENT STUDIES WORKING PAPERS, No. 398, 2016, Available at SSRN: https://ssrn.com/abstract=2898320 or http://dx.doi.org/10.2139/ssrn.2898320

Silvia Marchesi (Contact Author)

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

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Italy
+39 02 64483057 (Phone)

HOME PAGE: http://https://sites.google.com/site/ssilviamarchesi/home

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

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

Via P. Amedeo 34
Milano, Mi 20122
Italy

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