Life after Default: Private vs. Official Sovereign Debt Restructurings
University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 370
85 Pages Posted: 27 Sep 2017 Last revised: 21 Nov 2019
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Life after Default: Private vs. Official Sovereign Debt Restructurings
Life After Default: Private vs. Official Sovereign Debt Restructurings
Date Written: February 25, 2919
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, we find that defaults are correlated with contraction of short-term output growth. Most importantly, controlling for the severity of the default, we are 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. Using the Synthetic Control Method, we present further evidence for the heterogeneity of the economic impact of debt restructurings, confirming that official and private defaults may have different effects on GDP growth and should then be treated differently.
Keywords: Haircuts, Output Losses, Sovereign Defaults
JEL Classification: F34, G15, H63
Suggested Citation: Suggested Citation