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Life after default: Private vs. official sovereign debt restructurings

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  • Silvia, Marchesi
  • Tania, Masi

Abstract

This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and o¢ cial sovereign debt restructurings. Analyzing 73 default episodes in 117 countries over the period 1975-2013, we find that defaults are correlated with contraction of short-term output growth. Most importantly, controlling for the severity of the default, we are able to detect a more lasting and negative link between default and growth. While higher private haircuts imply a negative stigma which is associated to lower growth over a longer period, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run. Using the Synthetic Control Method, we present further evidence for the heterogeneity of the economic impact of debt restructurings, confirming that official and private defaults may have different effects on GDP growth and should then be treated differently.

Suggested Citation

  • Silvia, Marchesi & Tania, Masi, 2017. "Life after default: Private vs. official sovereign debt restructurings," Working Papers 370, University of Milano-Bicocca, Department of Economics, revised 22 Sep 2017.
  • Handle: RePEc:mib:wpaper:370
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    Keywords

    Haircuts; Output losses; Sovereign defaults;

    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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