A Study On The Cause And Cost Of Sovereign Debt Default

Sovereign bonds has been for centuries,since the birth of sovereign bonds,Sovereign default was existed.From the point of view of history,debt default has occurred among almost all of the countries.The sovereign debt crisis will trigger a financial market panic,even the economic recession.In 2010,the European sovereign debt crisis made the policy makers and scholars focus on sovereign debt default again.After the second world war,throughout all previous sovereign debt crisis,almost all other influential sovereign debt crisis happened in emerging markets and developing countries except the ongoing European sovereign debt crisis.As the United States will exit the quantitative easing monetary policy,some emerging markets and developing countries has been into trouble on repaying the debt,even for some countries nearly outbreak the debt crisis.so which factors lead to sovereign default in emerging markets and developing countries,and if a sovereign default,will it have a negative impact on the development of the economy?Based on the mentioned background,this paper uses quantitative and qualitative methods to study the cause of the sovereign debt default and the cost of default from several points.The main work and conclusions are presented as following:1.This paper summarizes the current domestic and foreign research about sovereign debt default.Firstly,we reviewed the development of sovereign bond markets,and explained why sovereign debt market will exist under the condition of sovereign immunity;Secondly,we review the literature on the cause of sovereign default from the point of the economic factor,political factor and the international financial environment factors;Again,we made a literature review on the cost of sovereign default literature review;Then,we summarized the domestic literature on the sovereign default.Finally,we analyzed the drawback of existing of literature review,pointed out the inefficiency,and made a foundation for later empirical analysis.2.We summarized emerging market sovereign debt crisis.In this chapter,we reviewed the background,process and evolution of the Latin American sovereign debt crisis in the 1980s,Russia's sovereign debt crisis in 1998 and Argentina's sovereign debt crisis in 2001.Combined with the sovereign debt crisis,we analyzed the cause of the national debt crisis,and summarized negative effects of economic development after the outbreak of sovereign debt crisis.3.We built econometric model to analyze the causes of sovereign default.First of all,the determinants of sovereign default have been analyzed from the point of economics,political factor,population structure change and the international financial environment,and the result show that some economic factors in this article like economic fluctuation,government debt and inflation rate have significant effects on the sovereign debt default.However,other economic factor which has been used in this article such as the terms of trade,the broadly money supply and the foreign exchange reserve ratio have little impact on sovereign default.And the empirical results also present that the relationship between national political risk and sovereign default.The higher risk of national political which means the more unstable political situation,the greater probability of sovereign debt default would have been realized.High population bring-up ratio increases the debt default risk.Focusing on international financial market,it is not difficult to find that the effects of both the floating of the US interest rate and financial crisis are not significant.Secondly,according to the geographical and cultural customs,we detailed the sample,and analyzed the main factors of sovereign default among the different region.In Latin America,default risk is mainly affected by short-term debt ratio,the effect of inflation and population bring-up ratio;In Asia,economic fluctuations,short-term debt,U.S.interest rates change,external variables,such as the financial crisis will affect sovereign default;In eastern Europe,the national political risk and terms of trade will significantly impact on default;The volatility of economic growth and short-term debt,gross government debt,inflation,and the terms of trade,national political risk and external financial crisis will affect southern African countries debt defaults;West Asia and north Africa sovereign default risk was mainly affected by fluctuations of economic development,short-term debt,gross government debt,and broad money and foreign exchange reserve requirements;In the emerging market countries,short-term debt,political factor,total debt ratio and inflation will affect the country's sovereign default risk.Finally,we studied the cause of sovereign default from the perspective of reputation,the results show that debt default history will reduce the risk of sovereign default,and this effect would last for about 4 years,in the short term,the default records can help the government to reduce its debt default risk,but in the long run,this effect is not significant.4.We estimated the cost of sovereign debt default.Overall,sovereign default can reduce about 3.8%of the economic growth rate,after we controlled the endogeneity,the result is still significantly negative.Considering the sovereign default expectations and history of default,the economy growth rate would fall about 5%,and we found that the expectation would have a negative impact on economic growth in one period,while sovereign debt default history would influence the development of economy in two period.Then,we cut the sample into "active default" and "passive default " based on the debt burden ratio,the results found that the output loss of "active default"country was about 2.4%,and the output loss of "passive default" country was about 5%,the output loss of"passive default" was significantly higher than "active default".Finally,we also made an empirical analysis of how sovereign default affected economic development in both the short term and the long term.In the short term,the growth of economic would reduce 5%by sovereign default,and there is a short to long term equilibrium correction mechanism,the adjust speed is 0.693,but in the long run,the defaulted countries were about 1%faster than other countries.The innovation of this dissertation are as following:First,most of the literature studied the cause of a sovereign default from the perspective of economics and political,and few scholars considered the factor of population on this problem.With the development of our society,population aging not only exists in developed countries,many developing countries also entered the aging society,the pension and health-care spending has become a crushing burden of government spending,raising the sovereign debt default risk.This article would consider the population age into empirical analysis on the base of previous study.In addition,we analyzed the cause of sovereign debt default from the perspective of the reputation,which is rare in the past studies.Secondly,Few scholars have focused on how sovereign debt default expectation and default history influenced on economic development in the previous research,and in this paper,we added them in the econometric model,and confirmed the two factors would bring adverse effect on economic growth.We studied the different influences on economic growth between the "active default" and "passive default ".We also did some robustness tests by using different sovereign default data.Finally,in order to investigate the long-term effect on economic growth and short-term correction mechanism of the sovereign debt default,we used Pooled Mean-Group Estimators to examine the sovereign debt default's short-term correction effect and long-term effect mechanism,Let us understand the dynamic mechanism on how sovereign default affected economic growth.