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Abstract:
We argue that, through its effect on aggregate demand and country risk premia, sovereign debt restructuring can adversely affect the private sector�s access to foreign capital markets. Using fixed effect analysis, we estimate that sovereign debt rescheduling episodes are indeed systematically accompanied by a decline in foreign credit to emerging market private firms, both during debt renegotiations and for over two years after the agreements are reached. This decline is large (over 20%), statistically significant, and robust when we control for a host of fundamentals. We find that this effect is different for financial sector firms, for exporters, and for nonfinancial firms in the non�exporting sector. We also find that the effect depends on the type of debt rescheduling agreement.
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