The Cost of Aggressive Sovereign Debt Policies: How Much is theprivate Sector Affected?

Author/Editor:

Christoph Trebesch

Publication Date:

February 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper proposes a new empirical measure of cooperative versus conflictual crisis resolution following sovereign default and debt distress. The index of government coerciveness is presented as a proxy for excusable versus inexcusable default behaviour and used to evaluate the costs of default for the domestic private sector, in particular its access to international debt markets. Our findings indicate that unilateral, aggressive sovereign debt policies lead to a strong decline in corporate access to external finance (loans and bond issuance). We conclude that coercive government actions towards external creditors can have strong signalling effects with negative spillovers on domestic firms. "Good faith" debt renegotiations may be crucial to minimize the domestic costs of sovereign defaults.

Series:

Working Paper No. 2009/029

Subject:

Credit Debt default Debt restructuring External debt Financial crises Money Public debt

English

Publication Date:

February 1, 2009

ISBN/ISSN:

9781451871760/1018-5941

Stock No:

WPIEA2009029

Pages:

37

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