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Countries rarely default on their debts

19.12.2017

According to Christoph Trebesch, there have been 14 such capital “busts” in the past 200 years similar to the sharp reversal of capital flows to emerging economies as a rsult of the collapse in commodity prices that began in 2011 and gathered pace during the “taper tantrum” of 2013

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(...) This dearth of distress is surprising, given the turmoil emerging economies have endured in recent years. The collapse in commodity prices that undid Venezuela was accompanied by a sharp reversal of capital flows to emerging economies that began in 2011 and gathered pace during the “taper tantrum” of 2013. There have been 14 such capital “busts” in the past 200 years, according to Carmen Reinhart of Harvard University, Vincent Reinhart of Standish Mellon Asset Management and Christoph Trebesch of the Kiel Institute for the World Economy. The most recent bust was the second-biggest of the lot. But it led to less distress than usual. If past patterns had held, such a severe setback would have resulted in 15-20 more defaults than actually transpired, the three scholars calculate.

What explains these “missing” defaults? Some may be hidden. China, for example, may have rescheduled or replenished some of its sizeable loans to emerging economies without ever declaring them bad. Indeed, China’s willingness to roll over its loans to Venezuela delayed, even if it did not ultimately prevent, the Bolivarian republic’s default on some of its other debts.

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