DP3157 One Reason Countries Pay Their Debts: Renegotiation and International Trade

Author(s): Andrew K Rose
Publication Date: January 2002
Keyword(s): bilateral, club, default, empirical, gravity, panel, Paris, rescheduling, sovereign
JEL(s): F10, F34
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3157

This Paper estimates the effect of sovereign debt renegotiation on international trade. Sovereign default may be associated with a subsequent decline in international trade either because creditors want to deter default by debtors, or because trade finance dries up after default. To estimate the effect, I use an empirical gravity model of bilateral trade and a large panel data set covering fifty years and over 200 trading partners. The model controls for a host of factors that influence bilateral trade flows, including the incidence of IMF programs. Using the dates of sovereign debt renegotiations conducted through the Paris Club as a proxy measure for sovereign default, I find that renegotiation is associated with an economically and statistically significant decline in bilateral trade between a debtor and its creditors. The decline in bilateral trade is approximately eight % a year and persists for around fifteen years.