## Default Premium

_IMF Working Papers, July 21, 2015_

## Source details

**Canonical URL:** [Default Premium](https://www.imf.org/en/publications/wp/issues/2016/12/31/default-premium-43105)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/default-premium-43105/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/default-premium-43105/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/default-premium-43105/bundle-manifest.json)

## Bibliographic details
- Authors: Luis Catão, Rui Mano
- Published: July 21, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513523507.001

---

### Summary and objective
- Re-assesses the view that sovereigns with a history of default are charged only a small and/or short-lived premium on the interest rate warranted by observed fundamentals.
- Introduces and applies a metric of the “default premium” (DP) that is consistent with asymmetric information models and nests previous metrics.
- Applies the DP metric to a broader dataset relative to earlier studies.

### Methodology and scope
- Metric: a DP measure consistent with asymmetric information models and encompassing prior metrics (described in the Working Paper).
- Data coverage: two historical samples highlighted:
  - 1870-1938
  - 1970-2011
- Publication details:
  - Pages: 57
  - Volume: 2015
  - Issue: 167
  - Series: Working Paper No. 2015/167
  - DOI: https://doi.org/10.5089/9781513523507.001
  - Stock No: WPIEA2015167
  - ISBN: 9781513523507
  - ISSN: 1018-5941

### Key quantitative findings
- 1870-1938 sample:
  - DP averaged 250 bps upon market re-entry.
  - DP tapered to around 150 bps five years out.
- 1970-2011 sample:
  - DP averaged about 400 bps upon market re-entry.
  - DP tapered to about 200 bps five years out.
- Within five years of market re-entry, the DP can account for as much as 60% of the sovereign spread.
- The DP rises with market exclusion spells.

### Robustness and ancillary results
- Estimates are robust to many controls, including controls on actual haircuts.
- Findings help reconcile theory and evidence regarding:
  - Why sovereign defaults are infrequent.
  - Why earlier debt settlements are desirable.

### Subject coverage and keywords
- Subjects: Asset and liability management; Credit; Debt default; Debt settlement; Emerging and frontier financial markets; External debt; Financial markets; Money; Public debt.
- Keywords: Country Risk; Credit; Debt default; Debt settlement; default premium; default premium variable; DP estimate; Emerging and frontier financial markets; Emerging Markets; exclusion spell; Global; Haircut; interest rate; Interest Rate Spread; market access; market exclusion; market re-entry; repayment decision; settlement dummy; Sovereign Debt; WP.

*Source: IMF Working Paper "Default Premium" by Luis Catão and Rui Mano, July 21, 2015 (Working Paper No. 2015/167; DOI: https://doi.org/10.5089/9781513523507.001).*

---

## Content in this bundle

- **Default Premium; by Luís A. V. Catão and Rui C. Mano; IMF Working Paper No. 15/167; July 1, 2015**
  - [Default Premium; by Luís A. V. Catão and Rui C. Mano; IMF Working Paper No. 15/167; July 1, 2015 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15167.pdf.md){rel="alternate" type="text/markdown"}
  - [Default Premium; by Luís A. V. Catão and Rui C. Mano; IMF Working Paper No. 15/167; July 1, 2015 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp15167.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/default-premium-43105_