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http://ssrn.com/abstract=760165
 
 

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Supersanctions and Sovereign Debt Repayment


Kris James Mitchener


Santa Clara University - Leavey School of Business - Economics Department; National Bureau of Economic Research (NBER); CEPR

Marc Weidenmier


Claremont Colleges - Robert Day School of Economics and Finance; National Bureau of Economic Research (NBER)

July 2005

NBER Working Paper No. w11472

Abstract:     
Theoretical models have suggested that sanctions may be important for enforcing sovereign debt contracts (Bulow and Rogoff, 1989a, 1989b). This paper examines the role of sanctions in promoting debt repayment during the classical gold standard period. We analyze a wide range of sanctions including gunboat diplomacy, external fiscal control over a country's finances, asset seizures by private creditors, and trade sanctions. We find that "supersanctions," instances where military pressure or political control were applied in response to default, were an important and commonly used enforcement mechanism from 1870-1913. Following the implementation of supersanctions, on average, ex ante default probabilities on new debt issues fell by more than 60 percent, yield spreads declined approximately 800 basis points, and defaulting countries experienced almost a 100 percent reduction of time spent in default. We also find that debt defaulters that surrendered their fiscal sovereignty for an extended period of time were able to issue large amounts of new debt on international capital markets. Consistent with policies advocated by Caballero and Dornbusch (2002) for Argentina, our results suggest that third-party enforcement mechanisms, with the authority to enact financial and fiscal reforms, may be beneficial for resuscitating the capital market reputation of sovereign defaulters.

Number of Pages in PDF File: 47

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Date posted: August 9, 2005  

Suggested Citation

Mitchener, Kris James and Weidenmier, Marc, Supersanctions and Sovereign Debt Repayment (July 2005). NBER Working Paper No. w11472. Available at SSRN: http://ssrn.com/abstract=760165

Contact Information

Kris James Mitchener (Contact Author)
Santa Clara University - Leavey School of Business - Economics Department ( email )
500 El Camino Real
Santa Clara, CA California 95053
United States
408.554.4340 (Phone)
408.554.2331 (Fax)
HOME PAGE: http://lsb.scu.edu/~kmitchener/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
CEPR ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Marc D. Weidenmier
Claremont Colleges - Robert Day School of Economics and Finance ( email )
500 E. Ninth St.
Claremont, CA 91711-6420
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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