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The Cost of Aggressive Sovereign Debt Policies: How Much is thePrivate Sector Affected?

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Author Info
Christoph Trebesch

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Abstract

This paper proposes a new empirical measure of cooperative versus conflictual crisis resolution following sovereign default and debt distress. The index of government coerciveness is presented as a proxy for excusable versus inexcusable default behaviour and used to evaluate the costs of default for the domestic private sector, in particular its access to international debt markets. Our findings indicate that unilateral, aggressive sovereign debt policies lead to a strong decline in corporate access to external finance (loans and bond issuance). We conclude that coercive government actions towards external creditors can have strong signalling effects with negative spillovers on domestic firms. "Good faith" debt renegotiations may be crucial to minimize the domestic costs of sovereign defaults.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/29.

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Length: 35 pages
Date of creation: 19 Feb 2009
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Handle: RePEc:imf:imfwpa:09/29

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Related research
Keywords: Sovereign debt ; Private sector ; International capital markets ; Spillovers ; External debt ; Debt management ; Debt restructuring ; Economic models ;

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  29. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich-to-Poor Capital Flows," American Economic Review, American Economic Association, vol. 94(2), pages 53-58, May. [Downloadable!]
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