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This time really could be different
Greece cannot afford to be sanguine. The Argentine example shows that the averages mask considerable variation. And there are several reasons to think that Greece’s experience in the event of a default would be worse than the norm. The academic research focuses on emerging markets because that is where all recent defaults have been. The impact of a Greek default, which would be the first by a rich country since the second world war, may be greater. If Greece defaulted, it would do so when the global economy is still weak, credit is scarce and other sovereign borrowers are raising lots of money. So markets may be less welcoming than other recent defaulters have found them. Greece’s use of the euro also means that it cannot devalue: that implies it would have to impose fairly high haircuts on creditors and might face a higher-than-average increase in its cost of borrowing.
Another element to the costs of default may also alarm Greek policymakers. Messrs Borensztein and Panizza find that political leadership changed in the year of default or the year after in half of the 22 cases they study. That is twice the usual probability of such change. These political costs, at least, are unlikely to vary.
http://www.economist.com/node/15814868
The article refers to the following papers:
“The Costs of Sovereign Default”, by Eduardo Borensztein and Ugo Panizza. IMF working paper, October 2008
“Costs of Sovereign Default”, by Bianca De Paoli, Glenn Hoggarth and Victoria Saporta, Bank of England, July 2006
“Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets”, by Udaibir Das, Michael Papaioannou, and Christopher Trebesch, IMF Working Paper, January 2010
“Crisis? What Crisis? Orderly Workouts for Sovereign Debtors”. Centre for Economic Policy Research, 1995
This time really could be different
Greece cannot afford to be sanguine. The Argentine example shows that the averages mask considerable variation. And there are several reasons to think that Greece’s experience in the event of a default would be worse than the norm. The academic research focuses on emerging markets because that is where all recent defaults have been. The impact of a Greek default, which would be the first by a rich country since the second world war, may be greater. If Greece defaulted, it would do so when the global economy is still weak, credit is scarce and other sovereign borrowers are raising lots of money. So markets may be less welcoming than other recent defaulters have found them. Greece’s use of the euro also means that it cannot devalue: that implies it would have to impose fairly high haircuts on creditors and might face a higher-than-average increase in its cost of borrowing.
Another element to the costs of default may also alarm Greek policymakers. Messrs Borensztein and Panizza find that political leadership changed in the year of default or the year after in half of the 22 cases they study. That is twice the usual probability of such change. These political costs, at least, are unlikely to vary.
http://www.economist.com/node/15814868
The article refers to the following papers:
“The Costs of Sovereign Default”, by Eduardo Borensztein and Ugo Panizza. IMF working paper, October 2008
“Costs of Sovereign Default”, by Bianca De Paoli, Glenn Hoggarth and Victoria Saporta, Bank of England, July 2006
“Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets”, by Udaibir Das, Michael Papaioannou, and Christopher Trebesch, IMF Working Paper, January 2010
“Crisis? What Crisis? Orderly Workouts for Sovereign Debtors”. Centre for Economic Policy Research, 1995
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