Life after default? Private vs. official sovereign debt restructurings

This paper studies the relationship between sovereign debt default and annual GDP growth taking into account the depth of a debt restructuring and distinguishing between commercial and official sovereign debt restructurings. Analyzing 73 default episodes in 117 countries over the period 1975-2013, I fi nd that defaults are correlated with contraction of short-term output growth. Most importantly, controlling for the severity of the default, I am able to detect a more lasting and negative link between default and growth. While higher private haircuts imply a negative stigma which is associated to lower growth over a longer period, higher amount of official restructuring may have some costs in the short-run, but are associated to an increase in growth in the long run. Adopting an alternative speci cation, in which the dependent variable is a country's credit rating, I fi nd very similar results for private haircuts and official restructurings. They are both associated to lower ratings up to seven years after the default. To the extent that credit ratings is a good proxy for borrowing costs, positive growth prospects for official defaulters seem not to be inuenced by a lower reputation in the credit markets.