The aftermath of sovereign debt crises

April 24, 2019 | Blog
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by Rui Esteves (Graduate Institute of International and Development Studies), Seán Kenny (Lund University) and Jason Lennard (National Institute of Economic and Social Research)

This paper was presented at the EHS Annual Conference 2019 in Belfast.



Financial Crisis. Available on Pixabay.


The memory of recent crises, such as the Argentinean default of 2001 or the Greek near-misses between 2010 and 2015, suggests that defaults are costly and are better avoided at all costs.

This was surely one of the key arguments that led the Syriza-led Greek government to back down from the uncompromising demands of debt relief. The fear of provoking the mother of all recessions by defaulting and exiting the euro focused the minds of politicians and paved the way for the third Greek bailout in 2015.

Likewise, everyone remembers the scenes of economic and political chaos after the Argentinean default of December 2001.

But countries do not usually stop paying their debts on a whim – defaults can be forced on them by large recessions, which sap their ability to collect taxes and repay their debts. Economists call these events ‘endogenous’ because the recessions are both a cause and consequence of defaults. It is therefore unclear whether defaults have any real penalty over and above the recessions that cause them in the first place.

This has led to disagreement in the research literature between authors finding large and persistent negative effects (Arteta and Hale, 2008; Furceri and Zdzienicka, 2012; Esteves and Jalles, 2016) and others who do not find any costs (Levy Yeyati and Panizza, 2011).

In our new study, we solve this empirical challenge by using a narrative approach to identify the causes of defaults since the mid-nineteenth century. Rather than relying on complicated statistical methods, we read contemporary reports from creditor organisations and financial newspapers.

Based on these sources, we classify each default as either endogenous (caused by economic shocks) or exogenous (caused by other factors, such as contagion or wars). The narrative approach has been used extensively in other contexts, such as identifying the effects of fiscal policy (Romer and Romer, 2010; Ramey, 2011), monetary policy (Romer and Romer, 2004; Lennard 2018) and banking crises (Jalil, 2015).

Our analysis suggests that some defaults are indeed caused by weak economies. For example, The Economist reported that ‘no commercial community has ever passed through a worse crisis than that of Uruguay’ prior to its default in 1876.

Others, however, are seemingly caused by more exogenous factors. On the Brazilian default in 1937, the Financial Times noted that there was ‘no sufficient economic justification for a suspension of existing payments’, citing the new dictator’s unwillingness to pay as the ultimate cause.

We then use the evidence from plausibly exogenous defaults and state-of-the-art empirical methods to settle cleanly the question of how defaults affect the economy. Our preliminary results show that there is a statistically and economically significant reduction in output in the aftermath of sovereign debt crises.




Arteta, C. and Hale, G., ‘Sovereign debt crises and credit to the private sector’, Journal of International Economics, 74 (2008), pp. 53-69.

Esteves, R. and Jalles, J., ‘Like father like sons? The cost of sovereign defaults in reduced credit to the private sector’, Journal of Money, Credit and Banking, 48 (2016), pp. 1515-45.

Furceri, D. and Zdzienicka, A., ‘How costly are debt crises?’, Journal of International Money and Finance, 31 (2012), pp. 726-42.

Jalil, A., ‘A new history of banking panics in the United States, 1825–1929: Construction and implications’, American Economic Journal: Macroeconomics, 7 (2015), pp. 295-330.

Lennard, J., ‘Did monetary policy matter? Narrative evidence from the classical gold standard’, Explorations in Economic History, 68 (2018), pp. 16-36.

Levy Yeyati, E. and Panizza, U., ‘The elusive costs of sovereign defaults’, Journal of Development Economics, 94 (2011), pp. 95-105.

Ramey, V. A., Identifying government spending shocks: It’s all in the timing’, Quarterly Journal of Economics, 126 (2011), pp. 1-50.

Romer, C. D. and Romer, D. H., ‘A new measure of monetary shocks: Derivation and implications’, American Economic Review, 94 (2004), pp. 1055-84.

Romer, C. D. and Romer, D. H., ‘The macroeconomic effects of tax changes: Estimates based on a new measure of fiscal shocks’, American Economic Review, 100 (2010), pp. 763-801.