Sovereign debt restructurings are associated with declines in GDP, investment, bank credit, and capital flows. The transmission channels and associated output and banking sector costs depend on whether the restructuring takes place preemptively, without missing payments to creditors, or whether it takes place after a default has occurred. Post-default restructurings are associated with larger declines in bank credit, an increase in lending interest rates, and a higher likelihood of triggering a banking crisis than pre-emptive restructurings. Our local projection estimates show large declines in GDP, investment, and credit amplified by severe sudden stops and transmitted through a 'capital inflow-credit channel'.

• Cover
• Contents
• I. Introduction
• II. New Stylized Facts on Sovereign Debt Restructurings, Banking Crises, Severe Credit and Capital Inflow Declines
  • A. Data on Sovereign Debt Restructurings, Banking Crises, Severe Credit and Capital Inflow Declines
  • B. Stylized Facts on GDP, Investment, Private Credit, and Capital Flows in Sovereign Debt Restructurings
  • C. Data on Macroeconomic Variables
  • D. Time Sample
• III. Local Projection Approach
  • A. Endogeneity of Debt Restructuring Decisions
  • B. Augmented Inverse Probability Weighted (AIPW) Estimation
  • C. Role of Capital Inflow-Credit Channel
  • D. Duration, Haircuts, and Missed Payments
• IV. Logit Approach
• V. Conclusion
• References
• Tables
  • 1: Dataset, 3-year Horizon
  • 2: Characteristics of the Treatment and Control Groups
  • 3: Predicting the Start of Debt Restructurings, Probit
  • 4: Predicting Duration and Haircuts, Poisson
  • 5: Banking Crises and Severe Credit and Net Capital Inflow Declines after Debt
• Figures
  • 1: Debt Restructurings, Severe Credit Declines and Protracted Net Capital Inflow Declines, 3-year Horizon
  • 2: Debt Restructurings and Banking Crises
  • 3: Debt Restructurings, Severe Credit and Net Capital Inflow Declines, 3-year Horizon
  • 4: GDP and Investment around Debt Restructurings, Average
  • 5: Private Credit, Lending Interest Rates, and Capital Flows around Debt Restructurings, Average
  • 6: Classification Power of the First Stage Regressors
  • 7: Local Projections, AIPW
  • 8: Private Credit, Investment, and GDP around Debt Restructurings, with/without Severe Sudden Stops, Average
  • 9: Restructurings with/without Severe Sudden Stops, AIPW
  • 6: Restructurings with/without Credit Crunches or Sudden Stops, AIPW
  • 10: GDP around Debt Restructurings with Short Duration and/or Small Haircuts, Average
  • 11: GDP after Post-default Restructurings, AIPW
• Appendices
  • A. Data
  • B. Further Empirical Analysis — Support for Stylized Facts
  • C. Estimation Results from Local Projections
  • D. Further Regression Results - Support for Main Results
  • E. Robustness Checks