Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel

European Stability Mechanism Working Paper Series 37/2019; ISBN 978-92-95085-68-8

81 Pages Posted: 19 Sep 2019

See all articles by Tamon Asonuma

Tamon Asonuma

International Monetary Fund Research Department

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Aitor Erce

European Union - European Investment Bank; European University Institute

Akira Sasahara

University of Idaho - College of Business & Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 25, 2018

Abstract

Sovereign debt restructurings are associated with declines in GDP, investment, bank credit, and capital flows. The transmission channels and associated output and banking sector costs depend on whether the restructuring takes place preemptively, without missing payments to creditors, or whether it takes place after a default has occurred. Post-default restructurings are associated with larger declines in bank credit, an increase in lending interest rates, and a higher likelihood of triggering a banking crisis than pre-emptive restructurings. Our local projection estimates show large declines in GDP, investment, and credit amplified by severe sudden stops and transmitted through a “capital inflow-credit channel”.

Keywords: Sovereign Defaults; Sovereign Debt Restructurings; GDP Growth; Investment; Banking Crisis; Local Projection

JEL Classification: F34; F41; H63

Suggested Citation

Asonuma, Tamon and Chamon, Marcos and Erce, Aitor and Sasahara, Akira, Costs of Sovereign Defaults: Restructuring Strategies, Bank Distress and the Capital Inflow-Credit Channel (March 25, 2018). European Stability Mechanism Working Paper Series 37/2019; ISBN 978-92-95085-68-8 . Available at SSRN: https://ssrn.com/abstract=3456128 or http://dx.doi.org/10.2139/ssrn.3456128

Tamon Asonuma (Contact Author)

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Marcos Chamon

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

Aitor Erce

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European University Institute ( email )

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Akira Sasahara

University of Idaho - College of Business & Economics ( email )

Moscow, ID 83944-3174
United States

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