Haircuts and the cost of sovereign default

Thirty years of research in international finance comes to a puzzling conclusion: A country that defaults on its debt does not seem to face serious penalties in credit markets in the medium and long run. The effects of defaults on borrowing costs are small or short-lived, and defaulters often regain access to new capital just one year after the crisis (see for example Panizza et al 2009 and Gelos et al 2011). These results stand in sharp contrast to economic theory, which suggests reputational punishment and market exclusion.

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