Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely

Carlo Cottarelli, Paolo Mauro, Lorenzo Forni and Jan Gottschalk

No 2010/012, IMF Staff Position Notes from International Monetary Fund

Abstract: This note summarizes the main arguments put forward by some market commentators who argue that default is inevitable, and presents a rebuttal for each argument in turn. Their main arguments focus on the size of the adjustment and continued market concerns reflected in government bond spreads. The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits. Thus, by lowering the interest bill while triggering the need to move to primary balance or a small primary surplus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the emerging economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would be ineffective and undesirable in today’s advanced economies.

Keywords: SPN; economy; debt; Greece; default; advanced economy; default episode; emerging economy defaulter; country default; gross financing; public debt debt ratio; restructuring debt; Fiscal consolidation; Fiscal stance; Debt restructuring; Real interest rates; Global (search for similar items in EconPapers)
Pages: 25
Date: 2010-09-01
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Citations: View citations in EconPapers (3)

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