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To Pay the Piper
Article

To Pay the Piper

IMF, 2015

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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Overview

Recommendation

When individuals don’t pay their debts, they usually must pay high interest rates on any future loan, if they can get one at all. But do countries that default face similar penalties when they negotiate a debt reduction and resume borrowing a few years later? This question is an important one, because elevated borrowing costs over an extended period of time could make future debt service burdens unmanageable. This original research from International Monetary Fund economists Luis A.V. Catão and Rui C. Mano offers conclusive evidence of the long-term punishing effects of sovereign debt default. getAbstract recommends it to policy makers and investors.

Take-Aways

  • Past research has suggested that a sovereign debt default’s aftereffects – especially higher interest rates as a “default premium” – are relatively mild or brief.
  • In addition, previous studies have purported that lender sanctions, impacts on national reputation or an inability of the private sector to access trade funding are usually minor postdefault penalties.
  • New research shows that the default premium is actually more severe than economists previously thought.

About the Authors

Luis A.V. Catão is a senior economist at the International Monetary Fund, where Rui C. Mano is an economist.