## On the Benefits of Repaying

_IMF Working Papers, September 10, 2021_

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**Canonical URL:** [On the Benefits of Repaying](https://www.imf.org/en/publications/wp/issues/2021/09/10/on-the-benefits-of-repaying-465418)

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## Bibliographic details
- Authors: Francesca Caselli, Matilde Faralli, Paolo Manasse, Ugo Panizza
- Published: September 10, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513596136.001

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### Research question and scope
- 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.

### Methodology
- 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.

### Key findings
- 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.

### Implications and interpretation
- 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.*

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_Source: https://www.imf.org/en/publications/wp/issues/2021/09/10/on-the-benefits-of-repaying-465418_