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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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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. No es ideología, es ignorancia (II)
      by Juan de Mercado in Nada Es Gratis on 2013-03-16 11:00:08

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    Cited by:

    1. Aitor Erce, 2012. "Selective sovereign defaults," Globalization Institute Working Papers 127, Federal Reserve Bank of Dallas.
    2. Carlo de Bassa & Edoardo Grillo & Francesco Passarelli, 2021. "Sanctions and incentives to repudiate external debt," Journal of Theoretical Politics, , vol. 33(2), pages 198-224, April.
    3. 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, vol. 2(1), pages 1-39, January.
    4. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2018. "Banks, government Bonds, and Default: What do the data Say?," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 98-113.
    5. Sosa-Padilla, César, 2018. "Sovereign defaults and banking crises," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 88-105.
    6. 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 - Leibniz Information Centre for Economics.
    7. 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.
    8. Mattia Osvaldo Picarelli, 2016. "Debt Overhang and Sovereign Debt Restructuring," Working Papers 9/16, Sapienza University of Rome, DISS.
    9. Horn, Fabian, 2015. "Quantifying the costs of sovereign defaults using odious debt cases as a quasi-natural experiment," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113125, Verein für Socialpolitik / German Economic Association.
    10. Coimbra, Nuno, 2020. "Sovereigns at risk: A dynamic model of sovereign debt and banking leverage," Journal of International Economics, Elsevier, vol. 124(C).
    11. repec:idb:brikps:82321 is not listed on IDEAS
    12. Juan J. Cruces & Christoph Trebesch, 2013. "Sovereign Defaults: The Price of Haircuts," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 85-117, July.
    13. 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.
    14. Pablo A. Gluzmann & Martin M. Guzman & Joseph E. Stiglitz, 2018. "An Analysis of Puerto Rico's Debt Relief Needs to Restore Debt Sustainability," NBER Working Papers 25256, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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