On the Benefits of Repaying

IMF Working Papers, September 10, 2021

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Investigates whether countries benefit from servicing their debts during times of widespread sovereign defaults.
Focuses on Colombia in the 1980s, commonly regarded as the only large Latin American country that did not default in that decade.
Examines short-, medium-, and long-term consequences of avoiding an explicit default.

Uses archival research and formal econometric estimates of Colombia's probability of default.
Constructs a counterfactual in which Colombia behaved like its neighboring countries to assess growth impacts.
Tests for long-term reputational benefits using an event study based on a large sudden stop.

In the early 1980s, Colombia's fundamentals were not significantly different from those of the Latin American countries that defaulted.
The decision by Colombian authorities to avoid explicit default was driven by the belief that maintaining a good reputation in the international capital market would yield substantial long-term payoffs.
Colombia re-profiled its debts rather than formally defaulting.
High-level political support from the US allowed Colombia to re-profile debt outside the standard framework of an IMF program.
Counterfactual analysis indicates that in the short to medium run, Colombia benefitted from avoiding an explicit default:
- GDP growth in the 1980s was higher than in the counterfactual where Colombia behaved like neighboring defaulting countries.
The event study finds no evidence of long-lasting reputational gains from Colombia's behavior in the 1980s.

Avoiding an explicit default can yield short- to medium-term growth benefits relative to defaulting peers, even when fundamentals are similar.
Political support from external actors (in this case, the US) can enable debt re-profiling outside IMF program frameworks, complicating simple comparisons between repayment and default strategies.
Long-term reputational benefits from repayment behavior are not guaranteed; empirical evidence in this case does not support persistent market-access advantages following the episode studied.

IMF Working Paper by Francesca Caselli, Matilde Faralli, Paolo Manasse, and Ugo Panizza; September 10, 2021.