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Fiscal Adjustments and the Probability of Sovereign Default

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  • Christoph A. Schaltegger
  • Martin Weder
Abstract
Based on probit estimates, this paper analyzes the effects of fiscal consolidation on the prob- ability of sovereign defaults in the short run. Using a panel of 104 developing countries from 1980 to 2009 and controlling for various economic, fiscal and political fa ctors, we find that fiscal adjustments in general do not significantly reduce the probability of default even if they are large. Instead, the composition of budget consolidation is decisive in reducing default risk. In contrast to industrialized countries, expenditure based adjustments are not successful while revenue based adjustments lower the probability of default in the following year by 33 to 56 percent. This finding also holds when economic growth is low or government debt is high as well as when IMF lending is taken into account.

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  • Christoph A. Schaltegger & Martin Weder, 2013. "Fiscal Adjustments and the Probability of Sovereign Default," CREMA Working Paper Series 2013-06, Center for Research in Economics, Management and the Arts (CREMA).
    • Handle: RePEc:cra:wpaper:2013-06
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    Cited by:

    1. Chrysanthakopoulos, Christos & Tagkalakis, Athanasios, 2023. "The effects of fiscal institutions on fiscal adjustment," Journal of International Money and Finance, Elsevier, vol. 134(C).
    2. Piotr Ciżkowicz & Andrzej Rzońca & Rafał Trzeciakowski, 2015. "Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions," Kyklos, Wiley Blackwell, vol. 68(4), pages 475-510, November.
    3. Christophe Blot & Jérôme Creel & Bruno Ducoudre & Xavier Timbeau, 2015. "Back to fiscal consolidation in Europe and its dual tradeoff : now or later, through spending cuts or tax hikes ?," SciencePo Working papers Main hal-01143545, HAL.
    4. Gilles Dufrénot & Anne-Charlotte Paret, 2018. "Sovereign debt in emerging market countries: not all of them are serial defaulters," Applied Economics, Taylor & Francis Journals, vol. 50(59), pages 6406-6443, December.
    5. Bardaka, Ioanna & Bournakis, Ioannis & Kaplanoglou, Georgia, 2021. "Total factor productivity (TFP) and fiscal consolidation: How harmful is austerity?," Economic Modelling, Elsevier, vol. 94(C), pages 908-922.
    6. Wildmer Daniel Gregori & Luigi Marattin, 2019. "Determinants of fiscal distress in Italian municipalities," Empirical Economics, Springer, vol. 56(4), pages 1269-1281, April.
    7. repec:hal:spmain:info:hdl:2441/6018jmm8rk9oroimutg7hhiu3f is not listed on IDEAS
    8. Horn, Fabian, 2015. "Quantifying the costs of sovereign defaults using odious debt cases as a quasi-natural experiment," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113125, Verein für Socialpolitik / German Economic Association.
    9. repec:spo:wpmain:info:hdl:2441/6018jmm8rk9oroimutg7hhiu3f is not listed on IDEAS
    10. Gootjes, Bram & de Haan, Jakob, 2022. "Do fiscal rules need budget transparency to be effective?," European Journal of Political Economy, Elsevier, vol. 75(C).
    11. Christoph A. Schaltegger & Martin Weder, 2014. "Fiscal adjustment and the costs of public debt service: evidence from OECD countries," Applied Economics, Taylor & Francis Journals, vol. 46(22), pages 2593-2610, August.
    12. Karim Triki, 2016. "Expenditure-based Consolidation: Experiences and Outcomes – Workshop proceedings," European Economy - Discussion Papers 026, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    13. Akeem Rahaman & Scott Mark Romeo Mahadeo, 2024. "Constructing country-specific debt sustainability indices for developing countries," Working Papers in Economics & Finance 2024-01, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.
    14. Arazmuradov, Annageldy, 2016. "Assessing sovereign debt default by efficiency," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 100-113.
    15. Rho, Caterina & Saenz, Manrique, 2021. "Financial stress and the probability of sovereign default," Journal of International Money and Finance, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    sovereign default; fiscal policy; fiscal adjustment; bailout;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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