The output costs of hard and soft sovereign default

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. How costly are sovereign debt crises? In this paper we study output losses during sovereign default and debt renegotiation episodes since 1980. In contrast to previous work, we account for the severity of default and not only for its occurrence. Specifically, we distinguish between "hard" and "soft" defaults, using new data on debtor payment and negotiation behavior and on the size of haircuts towards private external creditors. We show that hard defaults are associated with a much steeper drop in GDP, of up to ten percent, compared to soft defaults, and address concerns of reverse causality and omitted variable bias. The results question the standard assumption that defaults trigger fixed and lump-sum costs. Instead, our findings are consistent with models assuming proportional output costs of default. Terms of use: Documents in EconStor mayJEL-Codes: F340, F410, H630, G010.

Life After Default: Private vs. Official Sovereign Debt Restructurings

“…In line with Asonuma and Trebesch (2016) and Trebesch and Zabel (2017), our results points to the importance of the way in which debt restructurings are actually orchestrated, namely whether or not they are associated with more or less confrontational relationship between creditors and debtors, which might have persistent e¤ects. We also show that the size of the restructuring is important, as an "excessive" haircut (Edwards 2015) might blur the otherwise positive e¤ect of an o¢ cial restructuring.…”

“…In particular, o¢ cial restructuring are arranged within the Paris club umbrella, which is supposed to guarantee a relatively smoother approach to the way in which deals are actually orchestrated than private ones, hence lowering the collateral damage of a default. The importance of the way in which restructuring are actually arranged is con…rmed by the results of both Asonuma and Trebesch (2016) and Trebesch and Zabel (2017) who …nd that less confrontational (or preemptive) restructurings are associated with a lower output loss as compared to hard (non-preemptive) defaults.…”

Sovereign Debt Restructurings: Preemptive or Post-Default

“…In column (2) we add a standard set of growth controls used also by Sturzenegger (), Borensztein and Panizza () and others, in particular on population, investment to GDP, consumption, trade openness ((exports+imports)/GDP) (all from WDI), secondary education (from the Barro–Lee data set), an index of civil liberties (by Freedom House), as well as dummies for the onset of banking crises and currency crises from Leaven and Valencia (). The data set we use here was compiled for Trebesch and Zabel ().…”

“…An important result of our model is that a country will only initiate a preemptive debt restructuring when its default risk is high. To test this prediction, we assess the determinants of preemptive versus post‐default debt exchanges using a multinomial logit model with yearly data and for a large panel of 138 developing countries with a population exceeding 500,000 (the underlying panel data set is again borrowed from Trebesch and Zabel ). The dependent variable captures the onset of a preemptive or post‐default restructuring spell, building on the data set described in Section .…”

“…Using case studies, Erce () finds indication that GDP dynamics are worse following post‐default restructurings. Ongoing work by Trebesch and Zabel () builds on these findings and conducts a more extensive empirical analysis on the output costs of different types of sovereign default.…”