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Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel

Marcos Chamon (), Tamon Asonuma (), Aitor Erce () and Akira Sasahara

No 2019/069, IMF Working Papers from International Monetary Fund

Abstract: Sovereign debt restructurings are associated with declines in GDP, investment, bank credit, and capital flows. The transmission channels and associated output and banking sector costs depend on whether the restructuring takes place preemptively, without missing payments to creditors, or whether it takes place after a default has occurred. Post-default restructurings are associated with larger declines in bank credit, an increase in lending interest rates, and a higher likelihood of triggering a banking crisis than pre-emptive restructurings. Our local projection estimates show large declines in GDP, investment, and credit amplified by severe sudden stops and transmitted through a “capital inflow-credit channel”.

Keywords: WP; net capital; growth rate; banking sector; Sovereign Debt; Sovereign Defaults; Sovereign Debt Restructurings; GDP Growth; Investment; Banking Crisis; Local Projection; debt restructuring; net capital capital inflow; default restructuring; inflows-to-GDP ratio; Debt restructuring; Capital inflows; Sudden stops; Banking crises; Credit; Global (search for similar items in EconPapers)
Pages: 91
Date: 2019-03-25
New Economics Papers: this item is included in nep-ban
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