Default and Exclusion in Sovereign Debt Markets – Sebastian Horn

Speaker

Sebastian Horn (Kiel Institute)

Abstract

This paper revisits the costs of sovereign default in a new loan-level dataset covering all 54,881 loans and bonds contracted by 120 emerging markets and developing economies with external private creditors since 1970. Contrary to conventional wisdom, we show that sovereigns almost always retain partial access to international capital markets, even in years of outright default. Yet, defaults are costly because they erode a sovereign's creditor base. We find that defaulters rely on a narrower set of creditors, enter into fewer and smaller loan agreements and experience a contraction in new credit volume of more than 50 percent for multiple years. To rationalize these patterns, we build a reputation model with an endogenous creditor structure and illustrate how a default-induced erosion of the creditor base can have negative long-run effects on borrowing costs and debt-carrying capacity. 

Authors

Sebastian Horn (kiel Institute) – Clemens Graf von Luckner (Stanford)

Room

Media Room (A-211)