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To Pay the Piper
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To Pay the Piper

Luis A.V. Catão and Rui C. Mano
IMF, 2015
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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.

Summary

While past studies differ regarding the duration and levels of higher interest rates a country experiences after a sovereign debt default, they generally agree that any aftereffects are relatively mild or brief. Multiple reports propose that nations that defaulted in the 1930s paid only 25 to 30 basis points more than those that didn’t, and that though emerging markets in the 1990s and early 2000s paid a fairly hefty average “default premium” of up to 400 basis points, except for a few cases, that premium completely faded within two years. Governments might have other reasons for dodging defaults, such as lender...

About the Authors

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

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