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The cost of defaults: the impact of haircuts on economic growth

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  • Silvia Marchesi
  • Valeria Prato

Abstract

This paper studies the impact of debt default on economic growth taking into account the depth of a debt restructuring. More specifically, creditors' losses (or haircuts) are used as proxies of the severity of the default episodes. Analyzing 89 defaults in 72 countries over the period 1979-2005, consistently with previous results in this literature, we find that defaults have a negative and significant impact on short-term output growth. Moreover, controlling for the severity of the default through the haircut's size, we find that the severity of the default is indeed correlated with a further contraction in output one year after the default and with a positive increase in output three years after the default. Therefore, the use of a variable which is taken as a proxy of the severity of the default episode allows us to detect a more lasting (and eventually positive) effect of debt default on growth.

Suggested Citation

  • Silvia Marchesi & Valeria Prato, 2013. "The cost of defaults: the impact of haircuts on economic growth," Working Papers 265, University of Milano-Bicocca, Department of Economics, revised Dec 2013.
    • Handle: RePEc:mib:wpaper:265
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    References listed on IDEAS

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    More about this item

    Keywords

    Haircuts; Output losses; Sovereign defaults;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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