One Reason Countries Pay Their Debts: Renegotiation and International Trade
HKIMR Working Paper No. 4/2002
37 Pages Posted: 1 Aug 2006
Date Written: December 2001
This paper estimates the effect of sovereign debt renegotiation on international trade. Sovereign default may be associated with a subsequent decline in international trade either because creditors want to deter default by debtors, or because trade finance dries up after default. To estimate the effect, I use an empirical gravity model of bilateral trade and a large panel data set covering fifty years and more than 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of International Monetary Fund programs. Using the dates of sovereign debt renegotiations conducted through the Paris Club as a proxy measure for sovereign default, I find that renegotiation is associated with an economically and statistically significant decline in bilateral trade between a debtor and its creditors. The decline in bilateral trade is approximately 8 percent a year and persists for about fifteen years.
Keywords: empirical, sovereign, default, bilateral, gravity, rescheduling
JEL Classification: F10, F34
Suggested Citation: Suggested Citation