 The Costs of Sovereign Default: Theory and Empirical EvidenceEconomía Journal, 2016, vol. Volume 16 Number 2, issue Spring 2016, 1-27 Abstract: Economic policymakers sometimes perceive a sovereign default as a jump into the unkown. The main piece of information missing is what the costs of the default are going to be. Assessing these costs correctly is crucial for evaluating how far a country should go to avoid a default. This paper analyzes the main sources of the costs of default discussed in the theoretical literature and evaluates the empirical evidence on the matter. I classify these potential sources in three groups: (1) sanctions imposed as penalties by creditors; (2) costs related to the infor- mation content of default; and (3) costs related to domestic agents’ sovereign bond holdings. I then present a simple model that captures the main intuition behind each of them. A review of the empirical evidence suggests that while the costs generated in the aftermath of defaults by traditional mechanisms, such as trade sanctions or exclusion from credit markets, have not been signi cant in recent decades, costs deriving from information revelation and the impact on domestic bondholders, particularly the banking system, have become major consequences of sovereign defaults. Keywords: Sovereign debt; Sovereign defaults; Costs of sovereign debt (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:col:000425:014408 Access Statistics for this article More articles in Economía Journal from The Latin American and Caribbean Economic Association - LACEA Contact information at EDIRC. |
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