The Costs of Sovereign Default: Evidence from Argentina

The Costs of Sovereign Default: Evidence from Argentina

By
Benjamin Hébert, Jesse Schreger
American Economic Review. October
2017, Vol. 107, Issue 10, Pages 3119-3145

We estimate the causal effect of sovereign default on the equity returns of Argentine firms. We identify this effect by exploiting changes in the probability of Argentine sovereign default induced by legal rulings in the case of Republic of Argentina v. NML Capital. We find that a 10 percent increase in the probability of default causes a 6 percent decline in the value of Argentine equities and a 1 percent depreciation of a measure of the exchange rate. We examine the channels through which a sovereign default may affect the economy.