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Resolving Sovereign Debt Crises: The Role of Political Risk

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  • Christoph Trebesch
Abstract
Sovereign defaults are bad news for investors and debtor countries, in particular if a default becomes messy and protracted. Why are some debt crises resolved quickly, in a matter of months, while others take many years to settle? This paper studies the duration of sovereign debt crises based on a new dataset and case study archive on debt renegotiations between governments and foreign banks and bondholders. Using Cox proportional hazard models, I find that domestic political instability (‘political risk’) is a significant predictor of negotiation delays, after controlling for macroeconomic conditions. Government crises, resignations, and street protests are particularly disruptive for a quick settlement process. Overall, the evidence suggests that debtor countries often lack the political ability to resolve a debt crisis. Governments in turmoil are unlikely to exit a default quickly.

Suggested Citation

  • Christoph Trebesch, 2018. "Resolving Sovereign Debt Crises: The Role of Political Risk," CESifo Working Paper Series 7161, CESifo.
  • Handle: RePEc:ces:ceswps:_7161
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    References listed on IDEAS

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    Cited by:

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    2. Martin Pažický, 2021. "Predicting Recessions in Germany Using the German and the US Yield Curve," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 17(3), pages 263-291, December.
    3. Graf von Luckner, Clemens M. & Meyer, Josefin & Reinhart, Carmen M. & Trebesch, Christoph, 2024. "Sovereign haircuts: 200 years of creditor losses," Kiel Working Papers 2270, Kiel Institute for the World Economy (IfW Kiel).
    4. Elard, Ilaf, 2020. "Three-player sovereign debt negotiations," International Economics, Elsevier, vol. 164(C), pages 217-240.
    5. Carmen M. Reinhart, 2022. "From Health Crisis to Financial Distress," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(1), pages 4-31, March.
    6. Scholl, Almuth, 2024. "The politics of redistribution and sovereign default," Journal of International Economics, Elsevier, vol. 148(C).
    7. Chuku Chuku & Alexandre Kopoin, 2022. "Working Paper 367 - Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck?," Working Paper Series 2493, African Development Bank.
    8. M. Ayhan Kose & Peter S. O. Nagle & Franziska Ohnsorge & Naotaka Sugawara, 2020. "Can This Time Be Different? Policy Options in Times of Rising Debt," Koç University-TUSIAD Economic Research Forum Working Papers 2008, Koc University-TUSIAD Economic Research Forum.
    9. Mitchener, Kris & Trebesch, Christoph, 2021. "Sovereign Debt in the 21st Century: Looking Backward, Looking Forward," CEPR Discussion Papers 15935, C.E.P.R. Discussion Papers.
    10. Sayantan Ghosal & Marcus Miller, 2019. "Introduction to the special issue on sovereign debt restructuring," Oxford Economic Papers, Oxford University Press, vol. 71(2), pages 309-319.
    11. Calomiris, Charles W. & Tsoulouhas, Theofanis, 2022. "Bailing out conflicted sovereigns," Journal of Financial Intermediation, Elsevier, vol. 51(C).
    12. Sonenshine, Ralph & Kumari, Sapna, 2022. "The differential impact of political risk factors on emerging market bond spreads and credit rating outlooks," Journal of Economics and Business, Elsevier, vol. 120(C).
    13. Li Donni, Paolo & Marino, Maria & Welzel, Christian, 2021. "How important is culture to understand political protest?," World Development, Elsevier, vol. 148(C).
    14. Tamon Asonuma & Hyungseok Joo, 2021. "Public Capital and Fiscal Constraint in Sovereign Debt Crises," School of Economics Discussion Papers 0621, School of Economics, University of Surrey.
    15. Vladimir V. Zemskov & Valeriy I. Prasolov & Nikolai G. Sinyavsky & Oksana V. Konovalova & Lyudmila Kh. Botasheva, 2020. "Risks of private and sovereign debt as factors affecting the economic security of the state," RIVISTA DI STUDI SULLA SOSTENIBILITA', FrancoAngeli Editore, vol. 0(2 suppl.), pages 235-249.

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    More about this item

    Keywords

    sovereign default; crisis resolution; political economy;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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