The Cost of Aggressive Sovereign Debt Policies: How Much is theprivate Sector Affected?
IMF Working Papers, February 1, 2009
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Bibliographic details
- Authors: Christoph Trebesch
- Published: February 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871760.001
Research question and approach
- Proposes a new empirical measure of cooperative versus conflictual crisis resolution following sovereign default and debt distress.
- Introduces an index of government coerciveness as a proxy for excusable versus inexcusable default behaviour.
- Uses the coerciveness index to evaluate costs of default for the domestic private sector, with a particular focus on access to international debt markets.
Key findings
- Unilateral, aggressive sovereign debt policies lead to a strong decline in corporate access to external finance (loans and bond issuance).
- 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.
Implications for policymakers and stakeholders
- Cooperative, non-coercive approaches to sovereign debt restructuring can reduce adverse spillovers to the domestic private sector.
- Policymakers should consider the signalling effects of debt policy choices on corporate access to international financial markets.
- Minimizing coercive actions in debt renegotiations may preserve firms' ability to obtain external financing after sovereign distress.
Source: Christoph Trebesch, IMF Working Paper (February 1, 2009).