One Reason Countries Pay Their Debts: Renegotiation and International Trade

By Andrew K. Rose. 2005

446 citations recorded by the source corpus.

This paper estimates the effect of sovereign debt renegotiation on international trade. Sovereign default may be associated with a subsequent decline in international trade either because creditors want to deter default by debtors, or because trade finance dries up after default. To estimate the effect, I use an empirical gravity model of bilateral trade and a large panel data set covering fifty years and over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF programs. Using the dates of sovereign debt renegotiations conducted through the Paris Club as a proxy measure for sovereign default, I find that renegotiation is associated with an economically and statistically significant decline in bilateral trade between a debtor and its creditors. The decline in bilateral trade is approximately eight per cent a year and persists for around fifteen years.

Subfields: Economics and Econometrics, Finance, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/c137bcfca818f7258620c4e23c4280841379c8a0

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Citations in the corpus

How Costly are Debt Crises? (2011, unknown): “Rose (2005) finds a significant reduction in bilateral trade of approximately 8 percent per year following the occurrence of a sovereign default.”
Defaultable Debt, Interest Rates and the Current Account (2004, unknown): “ut = ¡ ct − 1 ωμgΓt−1Lt ¢1−γ 1− γ , (16)”
A Gravity Model of Sovereign Lending: Trade, Default, and Credit (2004, methodology): “We use a subset of the panel data set of Glick and Rose (2002); the interested reader is referred to Glick and Rose for more details.”
Understanding the determinants of sovereign debt ratings: Evidence for the two leading agencies (2003, unknown): “…having difficulties in raising enough public revenues and/or keeping a sound control of public 11 Eaton and Fernandez (1995) discuss the incentives that sovereigns have to reimburse their public debt while Rose (2002) sustains that sovereign default also ends up in a decline in international trade.”
The Elusive Costs of Sovereign Defaults (2006, unknown): “Focusing on the trade cost of defaults Rose (2002) found that countries that defaulted on official (Paris club debt) trade less with defaulted countries and 1 The first quote is form an unnamed financial industry official; the second comes from a memo prepared by the Central Banks of England and…”
Empirical Research on Sovereign Debt and Default (2013, background): “When countries default on official Paris Club debt, they experience a decline in trade relative to levels one would expect from the standard “gravity” model (Rose 2005; Borensztein and Panizza 2010).”
What Lies Beneath the Euro's Effect on Financial Integration? Currency Risk, Legal Harmonization, or Trade? (2010, unknown): “The coefficient on TRADEi,j,t is positive and significant, suggesting that trade in goods and bank claims go in tandem (e.g. Rose and Spiegel, 2004; Rose, 2005).”