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The Costs of Sovereign Defaults:Theory and Empirical Evidence

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  • Guido Sandleris

Abstract

Economic policy makers 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 them correctly is crucial to evaluate how far a country should go to avoid a default. This paper analyzes the main potential sources of the costs of defaults 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 information content of defaults; (3) costs related to domestic agents sovereign bond holdings, and present a simple model that captures the main intuition behind each of them. A review of the empirical evidence suggests that while costs generated in the aftermath of defaults by traditional mecha-nisms such as trade sanctions or exclusion from credit markets have not been significant in recent decades, the information revelation and the impact on domestic bond holders, particularly the banking system, seem to be the main costs of sovereign defaults.

Suggested Citation

  • Guido Sandleris, 2015. "The Costs of Sovereign Defaults:Theory and Empirical Evidence," Business School Working Papers 2015-02, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpbsdt:2015-02
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    References listed on IDEAS

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    Cited by:

    1. 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, pages 1-39.
    2. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2013. "Government default, bonds, and bank lending around the world: What do the data say?," Economics Working Papers 1378, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2015.
    3. 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 - German National Library of Economics.
    4. 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.
    5. Horn, Fabian, 2015. "Quantifying the costs of sovereign defaults using odious debt cases as a quasi-natural experiment," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113125, Verein für Socialpolitik / German Economic Association.
    6. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2013. "Government default, bonds, and bank lending around the world: What do the data say?," Economics Working Papers 1378, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2015.
    7. repec:idb:brikps:82321 is not listed on IDEAS
    8. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, pages 85-117.
    9. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2014. "Banks, Government Bonds, and Default: What do the Data Say?," CEPR Discussion Papers 10044, C.E.P.R. Discussion Papers.
    10. 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.

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