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
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: Suggested Citation