IMF Staff Position Notes

Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely

By Carlo Cottarelli, Paolo Mauro, Lorenzo Forni, Jan Gottschalk

September 1, 2010

Download PDF

Preview Citation

Format: Chicago

Carlo Cottarelli, Paolo Mauro, Lorenzo Forni, and Jan Gottschalk. Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely, (USA: International Monetary Fund, 2010) accessed December 22, 2024

Summary

This note summarizes the main arguments put forward by some market commentators who argue that default is inevitable, and presents a rebuttal for each argument in turn. Their main arguments focus on the size of the adjustment and continued market concerns reflected in government bond spreads. The essence of our reasoning is that the challenge stems mainly from the advanced economies’ large primary deficits. Thus, by lowering the interest bill while triggering the need to move to primary balance or a small primary surplus, default would not significantly reduce the need for major fiscal adjustment. In contrast, the emerging economies that defaulted in recent decades did so primarily as a result of high debt servicing costs, often in the context of major external shocks. We conclude that default would be ineffective and undesirable in today’s advanced economies.

Subject: Asset and liability management, Debt restructuring, Financial services, Fiscal consolidation, Fiscal policy, Fiscal stance, Public debt, Real interest rates

Keywords: Advanced economy, Country default, Debt, Debt restructuring, Default, Default episode, Economy, Emerging economy defaulter, Fiscal consolidation, Fiscal stance, Global, Greece, Gross financing, Public debt debt ratio, Real interest rates, Restructuring debt, SPN

Publication Details

  • Pages:

    25

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Staff Position Note No. 2010/012

  • Stock No:

    SPNEA2010012

  • ISBN:

    9781455261307

  • ISSN:

    2617-6742

You May Also Be Interested In...

A Confidence-Financial Inclusion Nexus in the Caucasus and Central Asia?

December 20, 2024

Ukraine: Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of a Performance Criterion, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for Ukraine

December 20, 2024

Islamic Republic of Mauritania: Selected Issues

December 20, 2024

Islamic Republic of Mauritania: Staff Report for the 2024 Article IV Consultation, Third Review Under the Arrangements Under the Extended Credit Facility and Extended Fund Facility, Request for Modification of Quantitative Performance Criteria, and Second Review Under the Resilience and Sustainability Facility Arrangement-Press Release; Staff Report; and Statement by the Executive Director for the Islamic Republic of Mauritania

December 20, 2024