Costs of sovereign default

Bianca De Paoli,*
Glenn Hoggarth** and Victoria Saporta**
Financial Stability Paper no.1

Over the past quarter of a century, emerging market economies (EMEs) have defaulted on their
sovereign debts frequently. This article assesses the size and types of costs that have been
associated with these defaults. It emphasises that costs, measured by the fall in output, are
particularly large when default is combined with banking and/or currency crises. Output losses
also seem to increase the longer that countries stay in arrears or take to restructure their debts.
The paper concludes with a number of policy suggestions to improve debt crisis prevention and
management and the role played by the IMF.


http://www.bankofengland.co.uk/publications/fsr/fs_paper01.pdf

* Monetary Analysis, Bank of England, Threadneedle Street, London, EC2R 8AH.
E-mail: bianca.depaoli@bankofengland.co.uk
** Financial Stability, Bank of England, Threadneedle Street, London, EC2R 8AH.
E-mail: glenn.hoggarth@bankofengland.co.uk and victoria.saporta@bankofengland.co.uk