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Supersanctions and Sovereign Debt Repayment

47 Pages Posted: 9 Aug 2005  

Kris James Mitchener

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

Marc Weidenmier

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

Date Written: July 2005

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.

Suggested Citation

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

Kris James Mitchener (Contact Author)

Santa Clara University - Leavey School of Business - Economics Department ( email )

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Santa Clara, CA California 95053
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HOME PAGE: http://lsb.scu.edu/~kmitchener/

National Bureau of Economic Research (NBER)

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CEPR ( email )

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Marc D. Weidenmier

Claremont McKenna College - 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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