The cost of default: private vs. official sovereign debt restructurings

Silvia Marchesi

No 320, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper studies the relationship between sovereign debt default and (short term) GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and official sovereign debt restructurings. Analyzing default episodes in 117 countries over the period 1975-2013, I find that, in the short term, defaults are correlated with significant contraction of output growth. Moreover, by controlling for both the occurrence and the magnitude of private and official defaults, I am able to detect a more lasting and negative link between default and growth (which eventually turns out to be positive but only for haircuts). In both cases I find evidence of a trade-off concerning the restructuring's size. Higher haircuts, however, may have some benefits in the short-run, but in turn imply a negative stigma which lower growth over a longer period. Conversely, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run. Adopting an alternative specification, in which the dependent variable is a country's credit rating, I investigate whether variation in the borrowing costs (highly correlated with credit ratings) may be one of the channels behind the link between restructuring and growth. I find that, in the case of haircuts, an improvement in the borrowing conditions a few years after the restructuring may explain a growth recovery. For official restructurings the evidence is more mixed.

Keywords: Haircuts; Output losses; Sovereign defaults (search for similar items in EconPapers)
JEL-codes: F34 G15 H63 (search for similar items in EconPapers)
Pages: 51
Date: 2015-12-28, Revised 2015-12-28
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