Heterogeneous Sovereign Debt Crisis Costs

Sovereign debt crisis costs vary across restructurings. We compile data on corporate borrowing from sovereigns’ (governments’) foreign creditor countries in 1977–2020. We find that prior to preemptive restructurings, corporates have higher external borrowing, and during preemptive restructurings, both corporate external borrowing and output decline modestly. We build sovereign debt model with endogenous sovereign’ choice of preemptive and default/post-default restructurings, corporate external borrowing, and output. We quantitatively show that sovereign’s preemptive restructuring choice moderately reduces the foreign creditor’s net worth and corporate external borrowing, which in turn, results in a moderate output decline—“external financing channel”. Data support theoretical predictions.