Partisan conflict and policy uncertainty are frequently invoked as factors contributing to slow post-crisis recoveries. Recent events in Europe provide ample evidence that the political aftershocks ...of financial crises can be severe. In this paper we study the political fall-out from systemic financial crises over the past 140years. We construct a new long-run dataset covering 20 advanced economies and more than 800 general elections. Our key finding is that policy uncertainty rises strongly after financial crises as government majorities shrink and polarization rises. After a crisis, voters seem to be particularly attracted to the political rhetoric of the extreme right, which often attributes blame to minorities or foreigners. On average, far-right parties increase their vote share by 30% after a financial crisis. Importantly, we do not observe similar political dynamics in normal recessions or after severe macroeconomic shocks that are not financial in nature.
Migration contributes to the circulation of goods, knowledge, and ideas. Using community and individual-level data from Moldova, we show that the emigration wave that started in the aftermath of the ...Russian crisis of 1998 strongly affected electoral outcomes and political preferences in Moldova during the following decade, eventually contributing to the fall of the last Communist government in Europe. Our results are suggestive of information transmission and cultural diffusion channels. Identification relies on the quasi-experimental context and on the differential effects arising from the fact that emigration was directed both to more democratic Western Europe and to less democratic Russia.
Sovereign debt crises are difficult to solve. This paper studies the “holdout problem,” meaning the risk that creditors refuse to participate in a debt restructuring. We document a large variation in ...holdout rates, based on a comprehensive new dataset of 23 bond restructurings with external creditors since 1994. We then study the determinants of holdouts and find that the size of creditor losses (haircuts) is among the best predictors at the bond level. In a restructuring, bonds with higher haircuts see higher holdout rates, and the same is true for small bonds and those issued under foreign law. Collective action clauses (CACs) are effective in reducing holdout risks. However, classic CACs, with bond-by-bond voting, are not sufficient to assure high participation rates. Only the strongest form of CACs, with single-limb aggregate voting, minimizes the holdout problem according to our simulations. The results help to inform theory as well as current policy initiatives on reforming sovereign bond markets.
How costly are sovereign debt crises? In this paper we study output losses during sovereign default and debt renegotiation episodes since 1980. In contrast to previous work, we account for the ...severity of default and not only for its occurrence. Specifically, we distinguish between “hard” and “soft” defaults, using new data on debtor payment and negotiation behavior and on the size of haircuts towards private external creditors. We show that hard defaults are associated with a much steeper drop in GDP, of up to ten percent, compared to soft defaults. The results are consistent with theoretical models assuming proportional output costs of default.
Abstract
Sovereign defaults are bad news for investors and debtor countries, in particular if a default becomes messy and protracted. Why are some debt crises resolved quickly, in a matter of months, ...while others take many years to settle? This paper studies the duration of sovereign debt crises based on a new data set and case study archive on debt renegotiations between governments and foreign banks and bondholders. Using Cox proportional hazard models, I find that domestic political instability (‘political risk’) is a significant predictor of negotiation delays, after controlling for macroeconomic conditions. Government crises, resignations, and street protests are particularly disruptive for a quick settlement process. Overall, the evidence suggests that debtor countries often lack the political ability to resolve a debt crisis. Governments in turmoil are unlikely to exit a default quickly.
Sovereign debt restructurings can be implemented preemptively—prior to a payment default. We code a comprehensive new data set and find that preemptive restructurings (i) are frequent (38% of all ...deals 1978-2010), (ii) have lower haircuts, (iii) are quicker to negotiate, and (iv) see lower output losses. To rationalize these stylized facts, we build a quantitative sovereign debt model that incorporates preemptive and post-default renegotiations. The model improves the fit with the data and explains the sovereign's optimal choice: preemptive restructurings occur when default risk is high ex ante, while defaults occur after unexpected bad shocks. Empirical evidence supports these predictions.
Populist Leaders and the Economy Funke, Manuel; Schularick, Moritz; Trebesch, Christoph
The American economic review,
12/2023, Letnik:
113, Številka:
12
Journal Article
Recenzirano
Odprti dostop
Populism at the country level is at an all-time high, with more than 25 percent of nations currently governed by populists. How do economies perform under populist leaders? We build a new long-run ...cross-country database to study the macroeconomic history of populism. We identify 51 populist presidents and prime ministers from 1900 to 2020 and show that the economic cost of populism is high. After 15 years, GDP per capita is 10 percent lower compared to a plausible nonpopulist counterfactual. Economic disintegration, decreasing macroeconomic stability, and the erosion of institutions typically go hand in hand with populist rule. (JEL D72, E23, N10, N40, O43)
This paper proposes a new empirical measure of cooperative versus conflictual crisis resolution following sovereign default and debt distress. The index of government coerciveness is presented as a ...proxy for excusable versus inexcusable default behaviour and used to evaluate the costs of default for the domestic private sector, in particular its access to international debt markets. Our findings indicate that unilateral, aggressive sovereign debt policies lead to a strong decline in corporate access to external finance (loans and bond issuance). We conclude that coercive government actions towards external creditors can have strong signalling effects with negative spillovers on domestic firms. "Good faith" debt renegotiations may be crucial to minimize the domestic costs of sovereign defaults.
China's overseas lending Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
Journal of international economics,
November 2021, 2021-11-00, Letnik:
133
Journal Article
Recenzirano
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Compared with China's pre-eminent status in world trade, its role in global finance is poorly understood. This paper studies the size, terms and destination of Chinese official international lending ...on the basis of a new “consensus” database of 4900 loans and grants to 146 countries, 1949–2017. Using the loan-level lending data we estimate outstanding debt stocks owed to China for more than 100 developing and emerging economies since 2000. As of 2017, China had become the world's largest official creditor, surpassing the World Bank and the IMF. The terms of China's state-driven international loans typically resemble commercial rather than official lending. We also find that 50% of China's official lending to developing countries is not reported in the most widely used official debt statistics. These “hidden” debts have important implications for debt sustainability.
Sovereign defaults in court Schumacher, Julian; Trebesch, Christoph; Enderlein, Henrik
Journal of international economics,
July 2021, 2021-07-00, 20210701, Letnik:
131
Journal Article
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For centuries, defaulting governments were immune from legal action by foreign creditors. This paper shows that this is no longer the case. Building a dataset covering four decades, we find that ...creditor lawsuits have become an increasingly common feature of sovereign debt markets. The legal developments have strengthened the hands of creditors and raised the cost of default for debtors. We show that legal disputes in the US and the UK disrupt government access to international capital markets, as foreign courts can impose a financial embargo on sovereigns. The findings are consistent with theoretical models with creditor sanctions and suggest that sovereign debt is becoming more enforceable. We discuss how the threat of litigation affects debt management, government willingness to pay, and the resolution of debt crises.
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