Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 01/14: Lending to developing countries: How do official creditors respond to sovereign defaults?

Cathrin N. Fløgstad () and Ingvild Nordtveit ()
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Cathrin N. Fløgstad: Department of Economics
Ingvild Nordtveit: Department of Economics

Abstract: How is lending to developing countries from bilateral and multilateral creditors affected by sovereign defaults? The existing empirical literature on reputational costs of defaults focuses on lending from private creditors. Many developing countries, however, mostly rely on grants and loans from official creditors as they are often excluded from international capital markets. Using a panel dataset covering 118 developing countries in the period from 1972 to 2011, we estimate the effect of sovereign defaults on disbursements of concessional and non-concessional loans from official creditors. Following a default, we find that concessional lending from bilateral and multilateral creditors is reduced. For non-concessional lending, the results depend on the measure of defaults and model specification. Thus, the reputational costs of default are not only caused by exclusion from commercial capital markets but also are present when looking at official lending.

Keywords: bilateral lending; multilateral lending; reputational costs of default

JEL-codes: F34; F35; H63

52 pages, April 10, 2014

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