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

Business & Finance, Economics, Money & Monetary Policy, Macroeconomics
Cover of the book Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely by Carlo Mr. Cottarelli, Paolo Mr. Mauro, Lorenzo Forni, Jan Gottschalk, INTERNATIONAL MONETARY FUND
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Author: Carlo Mr. Cottarelli, Paolo Mr. Mauro, Lorenzo Forni, Jan Gottschalk ISBN: 9781455270842
Publisher: INTERNATIONAL MONETARY FUND Publication: September 1, 2010
Imprint: INTERNATIONAL MONETARY FUND Language: English
Author: Carlo Mr. Cottarelli, Paolo Mr. Mauro, Lorenzo Forni, Jan Gottschalk
ISBN: 9781455270842
Publisher: INTERNATIONAL MONETARY FUND
Publication: September 1, 2010
Imprint: INTERNATIONAL MONETARY FUND
Language: English
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.
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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.

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