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

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

September 1, 2010

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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 November 21, 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:

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DOI:

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Issue:

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Series:

Staff Position Note No. 2010/012
Stock No:

SPNEA2010012
ISBN:

9781455261307
ISSN:

2617-6742

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