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

Author/Editor:

Tamon Asonuma ; Marcos d Chamon ; Aitor Erce ; Akira Sasahara

Publication Date:

March 25, 2019

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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 preemptively, 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”.

Series:

Working Paper No. 19/69

Subject:

English

Publication Date:

March 25, 2019

ISBN/ISSN:

9781498303255/1018-5941

Stock No:

WPIEA2019069

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

91

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