Fiscal Austerity and Sovereign Debt Restructurings

Sovereigns implement fiscal austerity, i.e., expenditure consolidation around debt crises. We compile data on fiscal expenditure consolidation around debt restructurings with private external creditors in 1975–2020. We find that expenditure consolidation precedes preemptive restructurings or prevents restructurings—“ex ante†—, while occurs upon defaults/postdefault restructurings—“ex post†. We build sovereign long-term debt model with endogenous choice of preemptive and post-default renegotiations and public capital accumulation. The model quantitatively shows when both public capital and debt are high, the sovereign implements ex ante fiscal expenditure consolidation which, in turn, results in preemptive restructurings or avoiding restructurings. Data support theoretical predictions.