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New Research Shows Markets Expect Sovereign Debt Default to Result in Devastating Blow

Sandro Andrade, assistant professor of finance at the University of Miami School of Business, explains the delicate economic situation in Greece and the impact of defaulting.

As Greece and other European countries struggle to pay their debts, some argue they should simply default, rather than implement severe austerity measures to pay their bills. This may be because there has been little solid evidence that the costs of sovereign default are significant.

That is, until now.

New research by Sandro Andrade and Vidhi Chhaochharia, assistant professors of finance at the School of Business Administration, shows that financial markets anticipate huge losses associated with sovereign default in nations where default appears possible.  

The researchers conclude that financial markets associate default with a 37 percent destruction of a country’s equity capital. These large prospective losses would result from an impairment of credit to the private sector and overall loss of government credibility.

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