Sovereign Debt Restructuring and Growth

This paper studies the relation between sovereign debt restructurings with external private creditors and growth during the period 1970-2010. We find that while growth generally declines in the aftermath of a sovereign debt restructuring, agreements that allow countries to exit a default spell (final restructurings) are associated with improving growth. The difference can be significant. In general, three years after restructuring, growth is about 5% lower compared to countries that did not face restructuring over the same period. The exception is for final restructurings, which result in positive growth in the years immediately after the restructuring. Final restructurings are associated with larger debt reliefs, and we show that post-restructuring growth is higher in countries that exit final restructurings with relatively low debt levels.