Fiscal Adjustments and the Probability of Sovereign Default

Christoph Schaltegger and Martin Weder

Kyklos, 2015, vol. 68, issue 1, 81-110

Abstract: type="main">

Based on probit estimates, this paper analyzes the effects of fiscal consolidation on the probability of sovereign default in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political factors, we find that fiscal adjustments in general do not significantly reduce the probability of default even if they are large. Instead, the composition of budget consolidation is decisive in reducing default risk. Expenditure based adjustments are not successful while revenue based adjustments lower the probability of default in the following year by 36 to 55 percent. This finding also holds when economic growth is low or government debt is high as well as when IMF lending is taken into account.

Date: 2015
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Working Paper: Fiscal Adjustments and the Probability of Sovereign Default (2013)
Working Paper: Fiscal Adjustments and the Probability of Sovereign Default (2013)
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