Download PDF: Working Paper 37
This paper shows how the output costs of sovereign defaults are intimately linked to the credit crunch and capital flight that such processes tend to generate.
Authors: Tamon Asonuma (IMF), Marcos Chamon (IMF), Aitor Erce (ESM), Akira Sasahara (University of Idaho)
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 pre-emptively, 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”.
Disclaimer: The views expressed in this Working Paper are those of the authors and should not be attributed to the European Stability Mechanism or IMF, their Executive Boards, or their managements..
Keywords: Sovereign debt; sovereign defaults; sovereign debt restructurings; GDP growth; investment; banking crisis; local projection
JEL codes: F34, F41, H63