Sovereign Debt Default and Economic Growth: What’s the Relationship?
What’s the relationship between sovereign debt default and annual GDP growth (considering the depth of a debt restructuring and the difference between commercial and official debt restructurings)?
Using our ICRG data as one of the control variables, this interesting study by the research arm of the Bank of Italy analyzes 73 default episodes in 117 countries from 1975 to 2013.
The study finds that defaults are correlated with contraction of short-term output growth. Most importantly – controlling for the severity of the default – there is a more lasting and negative link between default and growth. While higher private haircuts imply a negative stigma which is associated to lower growth over a longer period, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run.
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