On the Benefits of Repaying

Author/Editor:

Francesca G Caselli ; Matilde Faralli ; Paolo Manasse ; Ugo Panizza

Publication Date:

September 10, 2021

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:

This paper studies whether countries benefi t from servicing their debts during times of widespread sovereign defaults. Colombia is typically regarded as the only large Latin American country that did not default in the 1980s. Using archival research and formal econometric estimates of Colombia's probability of default, we show that in the early 1980s Colombia's fundamentals were not signifi cantly different from those of the Latin American countries that defaulted on their debts. We also document that the different path chosen by Colombia was due to the authorities' belief that maintaining a good reputation in the international capital market would have substantial long-term payoffs. We show that the case of Colombia is more complex than what it is commonly assumed. Although Colombia had to re-profi le its debts, high-level political support from the US allowed Colombia do to so outside the standard framework of an IMF program. Our counterfactual analysis shows that in the short to medium run, Colombia benefit ted from avoiding an explicit default. Speci fically, we find that GDP growth in the 1980s was higher than that of a counterfactual in which Colombia behaved like its neighboring countries. We also test whether Colombia's behavior in the 1980s led to long-term reputational benefi ts. Using an event study based on a large sudden stop, we find no evidence for such long-lasting reputational gains.

Series:

Working Paper No. 2021/233

Frequency:

regular

English

Publication Date:

September 10, 2021

ISBN/ISSN:

9781513596136/1018-5941

Stock No:

WPIEA2021233

Pages:

50

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