The Economic Impact of Sovereign Defaults in Latin America 1870-2012

Abstract

This article analyzes sovereign debt defaults in four Latin American countries—Argentina, Brazil, Chile and Mexico—for the period 1870-2012. The impact of sovereign defaults on real GDP growth is generally short-lived, while the impact in terms of output losses is deep and lasts long. Defaults in the period 1972-2012 show a deep and long-lasting impact compared to defaults in earlier periods. Moreover, the length of the contraction that follows a default is associated with favourable international conditions in the run-up to a default, while the depth of the contraction is associated with an expansive domestic economy in the run-up to a default. The results fit with boom–bust theories and sudden stop models.

Short- And Long-Run Effects of Devaluations: Evidence From Argentina

“…Later, Cerra and Saxena (2008) showed that devaluations associated with debt crises were especially harmful in the short run in Latin America. In fact, devaluations are typically associated with rising debt costs (Bordo and Rockoff 1996) and, ultimately, sovereign debt default (Boonman 2017). Kohn et al (2020), however, described how the increase in exports stimulates aggregate demand following large devaluations, thanks to firms' sales reallocation across markets.…”

“…Later, Cerra and Saxena (2008) showed that devaluations associated with debt crises were especially harmful in the short run in Latin America. In fact, devaluations are typically associated with rising debt costs (Bordo and Rockoff 1996) and, ultimately, sovereign debt default (Boonman 2017). Kohn et al .…”