IMF Working Paper Research Department The Costs of Sovereign Default Prepared by Eduardo Borensztein and Ugo Panizza October 2008We investigated the empirical basis of the costs of sovereign defaults in its different versions. Our findings suggest that default costs are significant, but short lived. Reputation of sovereign borrowers that fall in default, as measured by credit ratings and spreads, is tainted but only for a short time. While there is some evidence that international trade and trade credit are negatively affected by espisodes of default, we could not trace it to the volume of trade credit, as the default literature suggests. Debt defaults seem to cause banking crises, and not vice versa, but we found weak evidence to suggest the presence of default-driven credit crunches in domestic markets. Finally, defaults seem to shorten the life expectancy of governments and officials in charge of the economy in a significant way. Our results suggest that default costs remain somewhat vaguely defined, and difficult to quantify. On the positive side, we found a fairly sensible estimate of the effect on credit ratings and bond spreads, and we call attention to the sharp increase in government turnovers following debt crises. On the negative side, our result regarding how international trade credit affect the 23 link between trade and default and our finding that default episodes do not seem to affect bank lending do not seem to be very plausible. Perhaps the most robust and striking finding is that the effect of defaults is short lived, as we almost never can detect effects beyond one or two years.
Posted on: Mon, 31 Mar 2014 18:07:02 +0000
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