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Resolving Sovereign Debt Crises: The Role of Political Risk

Christoph Trebesch ()

No 7161, CESifo Working Paper Series from CESifo Group Munich

Abstract: Sovereign defaults are bad news for investors and debtor countries, in particular if a default becomes messy and protracted. Why are some debt crises resolved quickly, in a matter of months, while others take many years to settle? This paper studies the duration of sovereign debt crises based on a new dataset and case study archive on debt renegotiations between governments and foreign banks and bondholders. Using Cox proportional hazard models, I find that domestic political instability (‘political risk’) is a significant predictor of negotiation delays, after controlling for macroeconomic conditions. Government crises, resignations, and street protests are particularly disruptive for a quick settlement process. Overall, the evidence suggests that debtor countries often lack the political ability to resolve a debt crisis. Governments in turmoil are unlikely to exit a default quickly.

Keywords: sovereign default; crisis resolution; political economy (search for similar items in EconPapers)
JEL-codes: F34 F51 H63 (search for similar items in EconPapers)
Date: 2018
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