The output costs of hard and soft sovereign default

How costly are sovereign debt crises? In this paper we study output losses during sovereign default and debt renegotiation episodes since 1980. In contrast to previous work, we account for the severity of default and not only for its occurrence. Specifically, we distinguish between “hard” and “soft”...

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Bibliographic Details
Published in:	European economic review Vol. 92; pp. 416 - 432
Main Authors:	Trebesch, Christoph, Zabel, Michael
Format:	Journal Article
Language:	English
Published:	Elsevier B.V 01-02-2017
Subjects:	Debt restructuring Economic growth Reputation Sovereign debt crises F41 H63 Economic growth F34 Sovereign debt crises Debt restructuring G01 Reputation
Online Access:	Get full text
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Summary:	How costly are sovereign debt crises? In this paper we study output losses during sovereign default and debt renegotiation episodes since 1980. In contrast to previous work, we account for the severity of default and not only for its occurrence. Specifically, we distinguish between “hard” and “soft” defaults, using new data on debtor payment and negotiation behavior and on the size of haircuts towards private external creditors. We show that hard defaults are associated with a much steeper drop in GDP, of up to ten percent, compared to soft defaults. The results are consistent with theoretical models assuming proportional output costs of default.
ISSN:	0014-2921 1873-572X
DOI:	10.1016/j.euroecorev.2016.10.004