DO COUNTRIES DEFAULT IN “BAD TIMES”? | Zendy

Tomz Michael | Zendy; Wright Mark L. J. | Zendy

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DO COUNTRIES DEFAULT IN “BAD TIMES”?

Author(s) -

Tomz Michael,

Wright Mark L. J.

Publication year - 2007

Publication title -

journal of the european economic association

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.792

H-Index - 93

eISSN - 1542-4774

pISSN - 1542-4766

DOI - 10.1162/jeea.2007.5.2-3.352

Subject(s) - default , sovereign default , economics , debt , creditor , monetary economics , debt service coverage ratio , external debt , sovereign debt , payment , western hemisphere , sovereignty , international economics , macroeconomics , finance , politics , political science , law

This paper uses a new dataset to study the relationship between economic output and sovereign default for the period 1820–2004. We find a negative but surprisingly weak relationship between economic output in the borrowing country and default on loans from private foreign creditors. Throughout history, countries have indeed defaulted during bad times (when output was relatively low), but they have also suspended payments when the domestic economy was favorable, and they have maintained debt service in the face of adverse shocks. This constitutes a puzzle for standard theories of international debt, which predict a much tighter negative relationship as default provides partial insurance against declines in output. (JEL: F21, F34, F41)

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