Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely

 
Author/Editor: Cottarelli, Carlo ; Mauro, Paolo ; Forni, Lorenzo ; Gottschalk, Jan
 
Publication Date: September 01, 2010
 
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Summary: This note summarizes the main arguments put forward by some market commentators who argue that default is inevitable, and presents a rebuttal for each argument in turn. Their main arguments focus on the size of the adjustment and continued market concerns reflected in government bond spreads. The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits. Thus, by lowering the interest bill while triggering the need to move to primary balance or a small primary surplus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the emerging economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would be ineffective and undesirable in today’s advanced economies.
 
Series: Staff Position Note No. 2010/12
Subject(s): Budget deficits | Debt restructuring | Developed countries | Exchange rate adjustments | Interest rates | Public debt | Public finance | Sovereign debt

 
English
Publication Date: September 01, 2010
ISBN/ISSN: 9781455261307 Format: Paper
Stock No: SPNEA2010012 Pages: 25
Price:
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English
Publication Date: September 01, 2010
ISBN/ISSN: 978-1-61635-035-2 / 2072-3202 Format: A web quality merged PDF
Stock No: SPNET2010012 Pages: 26
Price:
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