Sovereign Debt, Default, Growth and Fiscal Crises
What are some of the implications of sovereign defaults and debt workouts to economic growth and fiscal crises?
Using our ICRG data, some very interesting working papers from the IMF and the Bank of Italy have some significant conclusions:
1/ Defaults are correlated with contraction of short-term output growth. But those countries with a higher proportion of official debt restructured have experienced higher growth in the long run.
2/ A larger share of debt held by the nonofficial sector is associated with a higher probability of a debtor country running into a fiscal crisis, and that the magnitude of the negative impact is larger at higher debt levels. Moreover, countries with a larger share of debt held by nonresidents are more likely to run into a fiscal crisis, and the magnitude of the estimated positive impact is larger at higher debt levels.
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