© 2008 International Monetary Fund WP/08/
IMF Working Paper
The Costs of Sovereign DefaultPrepared by Eduardo Borensztein and Ugo Panizza
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily representthose of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
This paper evaluates empirically four types of cost that may result from an internationalsovereign default: reputational costs, international trade exclusion costs, costs to the domesticeconomy through the financial system, and political costs to the authorities. It finds that theeconomic costs are generally significant but short-lived, and sometimes do not operatethrough conventional channels. The political consequences of a debt crisis, by contrast, seemto be particularly dire for incumbent governments and finance ministers, broadly in line withwhat happens in currency crises.
JEL Classification Numbers:
F34, F36, H63, G15.
Keywords: Sovereign Debt, Default, Country Risk, Public Debt, External DebtAuthors’ E-Mail addresses: firstname.lastname@example.org; email@example.com
Ugo Panizza is at the Debt and Finance Analysis Unit Division on Globalization and Development Strategies,UNCTAD. Research on this paper was initiated when both authors were at the Research Department of theInter-American Development Bank. We would like to thank Guillermo Calvo, Jeff Frieden, Eduardo Levy Yeyati,Guido Sandleris, and the participants of seminars at the IADB and the International Economic Association for useful suggestions and comments, and Patricio Valenzuela and Monica Yañez for excellent research assistance.