Title: One reason countries pay their debts
First published: 2001
Description: "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 more than 200 trading partners.  The model controls for a host of factors that influence bilateral trade flows, including the incidence of International Monetary Fund 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 8 percent a year and persists for about fifteen years"--Federal Reserve Bank of New York web site.
Subjects: Debt relief, Debts, External, External Debts, International economic integration, International trade, Repudiation
LC classification: HB1