Sovereign Debt Crises and Credit to the Private Sector

FRB International Finance Discussion Paper No. 878

Federal Reserve Bank of San Francisco Working Paper Series 2006-21

41 Pages Posted: 3 Aug 2006

See all articles by Carlos Oscar Arteta

Carlos Oscar Arteta

Board of Governors of the Federal Reserve - Division of International Finance (IFDP)

Galina Hale

University of California, Santa Cruz

Date Written: September 2006

Abstract

We argue that, through its effect on aggregate demand and country risk premia, sovereign debt restructuring can adversely affect the private sector's access to foreign capital markets. Using fixed effect analysis, we estimate that sovereign debt rescheduling episodes are indeed systematically accompanied by a decline in foreign credit to emerging market private firms, both during debt renegotiations and for over two years after the agreements are reached. This decline is large (over 20%), statistically significant, and robust when we control for a host of fundamentals. We find that this effect is different for financial sector firms, for exporters, and for nonfinancial firms in the non-exporting sector. We also find that the effect depends on the type of debt rescheduling agreement.

Keywords: sovereign debt, default, credit rationing, credit constraints

JEL Classification: F34, F32, G32

Suggested Citation

Arteta, Carlos Oscar and Hale, Galina, Sovereign Debt Crises and Credit to the Private Sector (September 2006). FRB International Finance Discussion Paper No. 878, Federal Reserve Bank of San Francisco Working Paper Series 2006-21, Available at SSRN: https://ssrn.com/abstract=920932 or http://dx.doi.org/10.2139/ssrn.920932

Carlos Oscar Arteta

Board of Governors of the Federal Reserve - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Mail Stop 24
Washington, DC 20551
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HOME PAGE: http://www.federalreserve.gov/research/staff/artetacarloso.htm

Galina Hale (Contact Author)

University of California, Santa Cruz ( email )

1156 High St
Santa Cruz, CA 95064
United States

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