Costs of sovereign debt crises: Restructuring strategies and bank intermediation

Sovereign debt restructurings are associated with declines in the growth of GDP, investment, bank credit to the private sector and capital flows. Our empirical findings show that the intensity of these losses depends on two aspects: whether the restructuring preempts a default and the extent of the reliance of the country’s private sector on domestic bank credit. Post-default restructurings are associated with worse outcomes than restructurings that take place preemptively without missing payments and going into default. Much of that difference is driven by restructurings in countries with relatively large banking sectors, in particular during post-default episodes. •Sovereign debt restructurings negatively affect GDP and investment.•Post-default restructurings tend to have worse outcomes than preemptive ones.•Difference in outcomes is larger when private sector relies more on bank credit.•Preemptive restructurings lead to smaller losses when the banking sector is large.