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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.

Suggested Citation

  • Carmen M. Reinhart & Christoph Trebesch, 2015. "Sovereign Debt Relief and its Aftermath," CESifo Working Paper Series 5422, CESifo.
    • Handle: RePEc:ces:ceswps:_5422
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    More about this item

    Keywords

    sovereign default; debt overhang; debt forgiveness; crisis resolution;

    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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