External Sovereign Debt Restructurings and Borrowing Costs, 1822-1980: Exploring the Reputational Costs of Sovereign Default

Sammanfattning

This paper attempts to shed light to one of the oldest puzzles in the sovereign debt literature: do sovereigns face higher borrowing costs after sovereign default? By utilising a newly released dataset by Meyer et al. (2022), this paper brings forth new evidence by examining all hard-currency sovereign bonds that were quoted on the London and New York stock exchanges between 1822 and 1980. When accounting for countries' macroeconomic indicators, as well as the size and timing of the restructuring that precedes the sovereigns market re-entrance, I find little evidence in favour of the hypothesis that sovereign default is consistently associated with higher future borrowing costs for sovereigns. There is some weak evidence for the hypothesis that time spent in a defaulted state is associated with higher post-restructuring spreads for individual bonds. However, as several methodological and data concerns posed problems to identification, further empirical evidence is needed to address this question conclusively.