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Sovereign Debt Relief And Its Aftermath

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  • Carmen M. Reinhart
  • Christoph Trebesch

Abstract

This paper studies sovereign debt relief in a long-term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920-1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978-2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras, averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We then analyze the aftermath of debt relief and conduct a difference-in-differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings.
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  • Carmen M. Reinhart & Christoph Trebesch, 2016. "Sovereign Debt Relief And Its Aftermath," Journal of the European Economic Association, European Economic Association, vol. 14(1), pages 215-251, February.
  • Handle: RePEc:bla:jeurec:v:14:y:2016:i:1:p:215-251
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    File URL: http://hdl.handle.net/10.1111/jeea.2016.14.issue-1
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    Cited by:

    1. Carmen M. Reinhart & Vincent Reinhart & Christoph Trebesch, 2016. "Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015," American Economic Review, American Economic Association, vol. 106(5), pages 574-580, May.
    2. Carmen M. Reinhart & Christoph Trebesch, 2016. "The International Monetary Fund: 70 Years of Reinvention," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 3-28, Winter.
    3. Fabrizio Balassone & Sara Cecchetti & Martina Cecioni & Marika Cioffi & Wanda Cornacchia & Flavia Corneli & Gabriele Semeraro, 2016. "Economic governance in the euro area: balancing risk reduction and risk sharing," Questioni di Economia e Finanza (Occasional Papers) 344, Bank of Italy, Economic Research and International Relations Area.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2015. "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 5-17, June.
    5. Silvia Marchesi, 2016. "Life after default? Private vs. official sovereign debt restructurings," Development Working Papers 398, Centro Studi Luca d'Agliano, University of Milano, revised 26 Aug 2016.
    6. Gregori Galofré-Vilà & Martin McKee & Christopher M. Meissner & David Stuckler, 2016. "The Economic Consequences of the 1953 London Debt Agreement," NBER Working Papers 22557, National Bureau of Economic Research, Inc.
    7. repec:elg:eechap:18261_7 is not listed on IDEAS
    8. Carmen M. Reinhart & Christoph Trebesch, 2015. "The Pitfalls of External Dependence: Greece, 1829–2015," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 307-328.
    9. Anusha Chari & Ryan Leary & Toan Phan, 2017. "The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico," NBER Working Papers 24108, National Bureau of Economic Research, Inc.
    10. Consiglio, Andrea & Zenios, Stavros A., 2015. "The Case for Contingent Convertible Debt for Sovereignst," Working Papers 15-13, University of Pennsylvania, Wharton School, Weiss Center.
    11. Trebesch, Christoph & Zabel, Michael, 2017. "The output costs of hard and soft sovereign default," European Economic Review, Elsevier, vol. 92(C), pages 416-432.
    12. Mattia Osvaldo Picarelli, 2016. "Debt Overhang and Sovereign Debt Restructuring," Working Papers 9/16, Sapienza University of Rome, DISS.
    13. Busch, Berthold & Matthes, Jürgen, 2015. "Ein Staatsinsolvenzverfahren für den Euroraum," IW policy papers 23/2015, Institut der deutschen Wirtschaft Köln (IW) / Cologne Institute for Economic Research.
    14. Lorenzo Forni & Geremia Palomba & Joana Pereira & Christine J. Richmond, 2016. "Sovereign Debt Restructuring and Growth," IMF Working Papers 16/147, International Monetary Fund.
    15. Marianna Astore & Michele Fratianni, 2016. ""We can't pay": How Italy cancelled war debts after Lausanne," Mo.Fi.R. Working Papers 129, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    16. Müller, Andreas & Storesletten, Kjetil & Zilibotti, Fabrizio, 2015. "Sovereign Debt and Structural Reforms," CEPR Discussion Papers 10588, C.E.P.R. Discussion Papers.
    17. Gong Cheng & Javier Diaz-Cassou & Aitor Erce, 2017. "From Debt Collection to Relief Provision: 60 Years of Official Debt Restructurings through the Paris Club," Working Papers 20, European Stability Mechanism.
    18. repec:sgm:jbfeuw:v:2:y:2015:i:4:p:13 is not listed on IDEAS
    19. Gong Cheng & Javier Díaz Cassou & Aitor Erce, 2017. "From Debt Collection to Relief Provision: 60 Years of Official Debt Restructurings through the Paris Club," IDB Publications (Working Papers) 8081, Inter-American Development Bank.

    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F30 - International Economics - - International Finance - - - General
    • N00 - Economic History - - General - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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