The Costs of Sovereign Default

52 Pages Posted: 18 Dec 2008

See all articles by Eduardo Borensztein

Eduardo Borensztein

Inter-American Development Bank (IADB)

Ugo Panizza

United Nations - Conference on Trade and Development (UNCTAD)

Date Written: October 2008

Abstract

This paper evaluates empirically four types of cost that may result from an international sovereign default: reputational costs, international trade exclusion costs, costs to the domestic economy through the financial system, and political costs to the authorities. It finds that the economic costs are generally significant but short-lived, and sometimes do not operate through conventional channels. The political consequences of a debt crisis, by contrast, seem to be particularly dire for incumbent governments and finance ministers, broadly in line with what happens in currency crises.

Keywords: Sovereign debt, Public debt, External debt, Financial risk, Financial crisis, Political economy, International trade, Bankruptcy

Suggested Citation

Borensztein, Eduardo and Panizza, Ugo, The Costs of Sovereign Default (October 2008). IMF Working Paper No. 08/238, Available at SSRN: https://ssrn.com/abstract=1316706

Eduardo Borensztein

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Ugo Panizza

United Nations - Conference on Trade and Development (UNCTAD) ( email )

Palais des Nations
Geneva, 1211
United States

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