The costs of sovereign default: theory and empirical evidence

Sandleris, Guido (2016) The costs of sovereign default: theory and empirical evidence. Economía, 16 (2). 1 - 28. ISSN 1529-7470

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• https://economia.lse.ac.uk/articles/10.3...

Abstract

Economic policymakers 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 these costs correctly is crucial for evaluating how far a country should go to avoid a default. This paper analyzes the main sources of the costs of default 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 default; and (3) costs related to domestic agents’ sovereign bond holdings. I then present a simple model that captures the main intuition behind each of them. A review of the empirical evidence suggests that while the costs generated in the aftermath of defaults by traditional mechanisms, such as trade sanctions or exclusion from credit markets, have not been significant in recent decades, costs deriving from information revelation and the impact on domestic bondholders, particularly the banking system, have become major consequences of sovereign defaults.

Item Type:	Article
Official URL:	https://economia.lse.ac.uk/
Additional Information:	© 2016 LACTEA
Divisions:	LSE
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public Finance H Social Sciences > HB Economic Theory
JEL classification:	F - International Economics > F3 - International Finance H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
Date Deposited:	08 Jul 2024 11:27
Last Modified:	12 Dec 2024 04:13
URI:	http://eprints.lse.ac.uk/id/eprint/123224

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