In a paper published this month, the IMF seeks to study the relationship between GDP and sovereign debt restructuring using data from 1970-2010. Its main conclusion may be shocking: “the central finding of this paper is that sovereign debt restructurings with external private creditors can affect per capita GDP growth performance in the years after debt restructuring.“ And these are the people in charge of advising nations on managing their economy…
The paper continues with the following insight “we find that there are bad and good (or “not so bad”) debt restructurings for growth. Growth generally declines following a debt restructuring operation; however, restructurings that allow countries to exit a default spell (i.e., final restructurings) lead to significant improvements in growth performance in the aftermath of the debt operation, with the effect being persistent over time.
Final restructurings are good for growth because they reduce countries’ debt (in NPV terms), and the lower the post restructuring debt is, the better the post restructuring growth performance for any given level of debt relief.
These results suggest that there is a difference between addressing debt sustainability and debt overhang issues.
While final restructurings supposedly address immediate debt sustainability issues and allow a country to exit default, they are important for growth if they address countries’ debt overhang issues and leave the country with a relative low debt ratio. These results can help to inform the policy debate concerning what to expect from different forms of restructuring”
Two interesting questions arise from this paper in our opinion: 1) Why is the Greece restructuring (2012) excluded from the analysis, especially considering that it is the largest sovereign restructuring in history? 2) If indeed final restructurings are important for growth, why has the Troika (IMF, ECB, and European Commission) essentially condemned Greece to a vicious cycle of debt re-negotiations, austerity and unsustainable expectations?
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