{
  "title": "Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely",
  "publication": "IMF Staff Position Notes, September 1, 2010",
  "sourceUrl": "https://www.imf.org/en/publications/imf-staff-position-notes/issues/2016/12/31/default-in-today-s-advanced-economies-unnecessary-undesirable-and-unlikely-24134",
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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.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- This IMF Staff Position 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.\n- The note emphasizes that the challenge for advanced economies stems mainly from large primary deficits; default would lower the interest bill while triggering the need to move to primary balance or a small primary surplus, and thus would not significantly reduce the need for major fiscal adjustment.\n- By 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.\n- Conclusion: default would be ineffective and undesirable in today’s advanced economies."
    },
    {
      "heading": "Main arguments addressed and rebuttals",
      "content": "- Argument: Default is inevitable because of the size of the required fiscal adjustment.\n  - Rebuttal: The core problem is large primary deficits; default reduces the interest bill but still requires moving to primary balance or a small primary surplus, so it would not materially reduce the overall adjustment needed.\n- Argument: Market concerns reflected in government bond spreads signal inevitability of default.\n  - Rebuttal: Spreads reflect market perceptions but do not imply that default is the only or best policy response; fiscal consolidation aimed at primary deficits addresses the fundamental problem."
    },
    {
      "heading": "Comparative evidence and context",
      "content": "- Advanced economies versus recent emerging-economy defaulters:\n  - Emerging economies that defaulted in recent decades typically faced high debt servicing costs and major external shocks.\n  - Advanced economies’ difficulties are characterized mainly by large primary deficits rather than prohibitive debt servicing costs."
    },
    {
      "heading": "Conclusions and policy implications",
      "content": "- Default in today’s advanced economies would be:\n  - Unnecessary: because policy can address large primary deficits without resorting to default.\n  - Undesirable: because default would be ineffective in substantially reducing the need for fiscal adjustment and could carry adverse consequences.\n  - Unlikely: given the nature of advanced-economy fiscal challenges compared with historical emerging-market default episodes.\n- Policy implication: Focus fiscal adjustment on reducing primary deficits and managing interest burdens rather than pursuing or relying on default as a solution.\n\nCarlo Cottarelli, Paolo Mauro, Lorenzo Forni, Jan Gottschalk; September 1, 2010; IMF Staff Position Note No. 2010/012; Pages: 25; DOI: https://doi.org/10.5089/9781455261307.004\n\n---\n\n Content in this bundle\n\n- Spn1012\n  - Spn1012 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Spn1012 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/imf-staff-position-notes/issues/2016/12/31/default-in-today-s-advanced-economies-unnecessary-undesirable-and-unlikely-24134"
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    "Authors: Carlo Cottarelli, Paolo Mauro, Lorenzo Forni, Jan Gottschalk",
    "Published: September 1, 2010",
    "Series: IMF Staff Position Notes",
    "DOI: https://doi.org/10.5089/9781455261307.004",
    "This IMF Staff Position 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.",
    "The note emphasizes that the challenge for advanced economies stems mainly from large primary deficits; default would lower the interest bill while triggering the need to move to primary balance or a small primary surplus, and thus would not significantly reduce the need for major fiscal adjustment.",
    "By 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.",
    "Conclusion: default would be ineffective and undesirable in today’s advanced economies.",
    "Argument: Default is inevitable because of the size of the required fiscal adjustment.",
    "Argument: Market concerns reflected in government bond spreads signal inevitability of default.",
    "Advanced economies versus recent emerging-economy defaulters:",
    "Default in today’s advanced economies would be:",
    "Policy implication: Focus fiscal adjustment on reducing primary deficits and managing interest burdens rather than pursuing or relying on default as a solution.",
    "**Spn1012**"
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