Fiscal Austerity and Sovereign Debt Restructurings

Tamon Asonuma and Hyungseok Joo
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Tamon Asonuma: International Monetary Fund
Hyungseok Joo: University of Surrey

No 525, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Sovereigns implement fiscal austerity, i.e., expenditure consolidation around debt crises. We compile data on fiscal expenditure consolidation around debt restructurings with private external creditors in 1975–2020. We find that expenditure consolidation precedes preemptive restructurings or prevents restructurings—“ex ante†—, while occurs upon defaults/postdefault restructurings—“ex post†. We build sovereign long-term debt model with endogenous choice of preemptive and post-default renegotiations and public capital accumulation. The model quantitatively shows when both public capital and debt are high, the sovereign implements ex ante fiscal expenditure consolidation which, in turn, results in preemptive restructurings or avoiding restructurings. Data support theoretical predictions.

JEL-codes: F34 F41 H63 (search for similar items in EconPapers)
Pages: 93 pages
Date: 2025-07
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0525

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