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The Costs of Sovereign Default: Theory and Empirical Evidence

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  • Guido Sandleris

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," Economía 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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    1. No es ideología, es ignorancia (II)
      by Juan de Mercado in Nada Es Gratis on 2013-03-16 11:00:08

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    Cited by:

    1. 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.
    2. Horn, Fabian, 2015. "Quantifying the costs of sovereign defaults using odious debt cases as a quasi-natural experiment," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113125, Verein für Socialpolitik / German Economic Association.
    3. 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.
    4. Mattia Osvaldo Picarelli, 2016. "Debt Overhang and Sovereign Debt Restructuring," Working Papers 9/16, Sapienza University of Rome, DISS.
    5. Pablo A. Gluzmann & Martin M. Guzman & Joseph E. Stiglitz, 2018. "An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability," NBER Working Papers 25256, National Bureau of Economic Research, Inc.
    6. Aitor Erce, 2012. "Selective sovereign defaults," Globalization Institute Working Papers 127, Federal Reserve Bank of Dallas.
    7. Sosa-Padilla, César, 2018. "Sovereign defaults and banking crises," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 88-105.
    8. Coimbra, Nuno, 2020. "Sovereigns at risk: A dynamic model of sovereign debt and banking leverage," Journal of International Economics, Elsevier, vol. 124(C).
    9. repec:idb:brikps:82321 is not listed on IDEAS
    10. 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.
    11. Carlo de Bassa & Edoardo Grillo & Francesco Passarelli, 2021. "Sanctions and incentives to repudiate external debt," Journal of Theoretical Politics, , vol. 33(2), pages 198-224, April.
    12. 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.
    13. 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.
    14. 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.

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    More about this item

    Keywords

    Sovereign debt; Sovereign defaults; Costs of sovereign debt;
    All these keywords.

    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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