On the Benefits of Repaying
Ugo Panizza,
Francesca Caselli,
Matilde Faralli and
Paolo Manasse
No 16539, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Abstract:
This paper studies whether countries benefit from servicing their debts during times of widespread sovereign defaults. Colombia is typically regarded as the only large Latin American country that did not default in the 1980s. Using archival research and formal econometric estimates of Colombia's probability of default, we show that in the early 1980s Colombia's fundamentals were not significantly different from those of the Latin American countries that defaulted on their debts. We also document that the different path chosen by Colombia was due to the authorities' belief that maintaining a good reputation in the international capital market would have substantial long-term payoffs. We show that the case of Colombia is more complex than what is commonly assumed. Although Colombia had to re-profile its debts, high-level political support from the US allowed Colombia do to so outside the standard framework of an IMF program. Our counterfactual analysis shows that in the short to medium run, Colombia benefited from avoiding an explicit default. Specifically, we find that GDP growth in the 1980s was higher than that of a counterfactual in which Colombia behaved like its neighboring countries. We also test whether Colombia's behavior in the 1980s led to long-term reputational benefits. Using an event study based on a large sudden stop, we find no evidence for such long-lasting reputational gains.
Keywords: Sovereing debt; Default; Reputation (search for similar items in EconPapers)
JEL-codes: F32 F34 H63 (search for similar items in EconPapers)
Date: 2021-09
References: Add references at CitEc
Citations:
Downloads: (external link)
https://cepr.org/publications/DP16539 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
Related works:
Working Paper: On the Benefits of Repaying (2021) 
Working Paper: On the Benefits of Repaying (2021) 
Working Paper: On the Benefits of Repaying (2021) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:16539
Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16539
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().