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

Author/Editor: Cottarelli, Carlo | Mauro, Paolo | Forni, Lorenzo | Gottschalk, Jan
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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.
 
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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  
    Published:   September 1, 2010        
    ISBN/ISSN:   9781455261307   Format:   Paper
    Stock No:   SPNEA2010012   Pages:   25
    Price:   Free        
English  
    Published:   September 1, 2010        
    ISBN/ISSN:   978-1-61635-035-2 / 2072-3202   Format:   A web quality merged PDF
    Stock No:   SPNET2010012   Pages:   26
    Price:   Free        
     
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