Sovereign Debt Crises and Credit to the Private Sector

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Sovereign Debt Crises and Credit to the Private Sector

by Carlos Arteta of the Board of Governors of Federal Reserve, and
Galina Hale of the Federal Reserve Bank of San Francisco

December 15, 2006

Abstract: We use micro-level data to analyze emerging markets- private sector access to international debt markets during sovereign debt crises. Using fixed effect analysis, we find that these crises are systematically accompanied by a decline in foreign credit domestic private firms, both during debt renegotiations and for over two years after the restructuring agreements are reached. This decline is large (over 20 percent), statistically significant, and robust when we control for a host of fundamentals. We find that this effect is concentrated in the nonfinancial sector and is different for exporters and for firms in the non-exporting sector. We also find that the magnitude of the effect depends on the type of debt restructuring agreement.

JEL Classification: F34, F32, G32.

Keywords: sovereign debt, debt crisis, credit rationing, credit constraints.

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