01 Aug 2016Working Paper Summaries

The Costs of Sovereign Default: Evidence from Argentina

by Jesse Schreger and Benjamin Hebert
For several decades, one of the most important questions in international macroeconomics has been “why do governments repay their debts?” This study provides evidence that a sovereign default significantly reduces the value of domestic firms. Foreign-owned firms, exporters, banks, and large firms are particularly hurt more by increases in the probability of sovereign default.

Author Abstract

We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. We find that a 10% increase in the probability of default causes a 6% decline in the value of Argentine equities and a 1% depreciation of a measure of the exchange rate. We examine the channels through which a sovereign default may affect the economy.

Paper Information

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