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The Costs of Sovereign Default: Theory and Empirical Evidence

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  • Guido Sandleris

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Abstract

Economic policymakers sometimes perceive a sovereign default as a jump into the unkown. The main piece of information missing is what the costs of the default are going to be. Assessing these costs correctly is crucial for evaluating how far a country should go to avoid a default. This paper analyzes the main sources of the costs of default discussed in the theoretical literature and evaluates the empirical evidence on the matter. I classify these potential sources in three groups: (1) sanctions imposed as penalties by creditors; (2) costs related to the infor- mation content of default; and (3) costs related to domestic agents’ sovereign bond holdings. I then present a simple model that captures the main intuition behind each of them. A review of the empirical evidence suggests that while the costs generated in the aftermath of defaults by traditional mechanisms, such as trade sanctions or exclusion from credit markets, have not been signi cant in recent decades, costs deriving from information revelation and the impact on domestic bondholders, particularly the banking system, have become major consequences of sovereign defaults.

Suggested Citation

  • Guido Sandleris, 2016. "The Costs of Sovereign Default: Theory and Empirical Evidence," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 1-27, April.
  • Handle: RePEc:col:000425:014408
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Horn, Fabian, 2015. "Quantifying the costs of sovereign defaults using odious debt cases as a quasi-natural experiment," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113125, Verein für Socialpolitik / German Economic Association.
    2. Aitor Erce, 2012. "Selective sovereign defaults," Globalization Institute Working Papers 127, Federal Reserve Bank of Dallas.
    3. repec:eee:moneco:v:98:y:2018:i:c:p:98-113 is not listed on IDEAS
    4. Fernández, Raquel & Martin, Alberto, 2014. "The Long and the Short of It: Sovereign Debt Crises and Debt Maturity," CEPR Discussion Papers 10322, C.E.P.R. Discussion Papers.
    5. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2018. "Banks, government Bonds, and Default: What do the data Say?," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 98-113.
    6. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2013. "Government default, bonds, and bank lending around the world: What do the data say?," Economics Working Papers 1378, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2015.
    7. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    8. Joseph E. Stiglitz, 2013. "Stable Growth in an Era of Crises; Learning from Economic Theory and History," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 1-39, January.
    9. repec:idb:brikps:82321 is not listed on IDEAS
    10. Chakrabarti, Avik & Zeaiter, Hussein, 2014. "The determinants of sovereign default: A sensitivity analysis," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 300-318.
    11. Michael, Bryane & Zhao, Simon, 2016. "Bubble Economics How Big a Shock to China’s Real Estate Sector Will Throw the Country into Recession, and Why Does It Matter?," EconStor Preprints 141314, ZBW - Leibniz Information Centre for Economics.

    More about this item

    Keywords

    Sovereign debt; Sovereign defaults; Costs of sovereign debt;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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