Reputation in International Capital Markets and Sovereign Default

At UCLA, there are often working paper reprints sitting around in the mail room.  I'm guy who knows how to read and I skim through these piles to see if there is any new work that I might learn from.  A paper called "Sovereign Defaults: The Price of Haircuts" by Cruces and Trebesch caught my eye.  Here is their abstract:


"A main puzzle in the sovereign debt literature is that defaults have only minor effects on
subsequent borrowing costs and access to credit. This paper comes to a different conclusion.
We construct the first complete database of investor losses (“haircuts”) in all restructurings
with foreign banks and bondholders from 1970 until 2010, covering 180 cases in 68 countries.
We then show that restructurings involving higher haircuts are associated with significantly
higher subsequent bond yield spreads and longer periods of capital market exclusion. The
results cast doubt on the widespread belief that credit markets “forgive and forget.”"

As a person who continues to invest his own reputation, I'm glad to see that building a reputation has long run consequences.   Before I stumbled across this paper,  I had been quite puzzled by this literature.  The past international macro evidence defied my training in risk premiums and updating; "fool me once --- shame on you,  fool me twice --- shame on me".

These findings have important implications today as Greece must make some tough decisions.