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

81 Pages Posted: 15 Nov 2019

See all articles by Tamon Asonuma

Tamon Asonuma

International Monetary Fund (IMF) Research Department

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Aitor Erce

UPNA

Akira Sasahara

Keio University

Multiple version iconThere are 3 versions of this paper

Date Written: May 21, 2019

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 pre-emptively, 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 debt; 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 (May 21, 2019). European Stability Mechanism Working Paper No. 37, Available at SSRN: https://ssrn.com/abstract=3486806 or http://dx.doi.org/10.2139/ssrn.3486806

Tamon Asonuma

International Monetary Fund (IMF) 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 (Contact Author)

UPNA ( email )

Pamplona
Spain

Akira Sasahara

Keio University ( email )

2-15-45 Mita, Ninato-ku
Tokyo 1088345
Japan

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