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Speaker:
Tamon Asonuma (International Monetary Fund)

Output Dynamics and Private Sector Access during Sovereign Debt Crises

^{(joint with Hyungseok Joo and Dilek Sevinc)}

Abstract: Output dynamics and private sector access vary across sovereign debt restructurings with foreign private creditors. We compile data on sovereigns’ private sector borrowing from sovereign’ foreign creditor chair countries in 1977–2020. We find that (i) sovereigns with high private sector borrowing from sovereigns’ creditor chair countries choose a preemptive restructuring; (ii) private sector borrowing from sovereigns’ creditor chair countries declines mildly in preemptive restructurings while sharply in post-default restructurings. We build sovereign debt model with endogenous choice of preemptive and post-default renegotiations, output dynamics and private sector access. Our model quantitatively shows that the sovereign’s choice of preemptive or post-default restructuring affects differently the foreign creditor’s net worth and lending to the sovereign’s private sector, and, in turn, this results in different output dynamics. Data support theoretical predictions.

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