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June 14, 2023: Tamon Asonuma (IMF)

Special session: 16:15-17:45 p.m.

Lecture hall 104

Fiscal Austerity and Sovereign Debt Restructurings

Sovereigns implement fiscal austerity, i.e., expenditure consolidation around debt crises. We compile data on fiscal expenditure consolidation around sovereign debt restructurings with private external creditors in 1975–2020. We find that (i) expenditure consolidation precedes preemptive restructurings—“ex ante”—, while occurs upon defaults/post-default restructurings—“ex post”—; and (ii) public investment dynamics and restructuring duration differ between preemptive and post-default restructurings. We build sovereign debt model with endogenous choice of preemptive and post-default renegotiations and public capital accumulation. Our model quantitatively shows that high public capital allows the sovereign to implement ex ante fiscal expenditure consolidation, in turn, results in subsequent preemptive restructurings. Data support theoretical predictions.