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Published online by Cambridge University Press:  04 December 2018

Hippolyte Wenéyam Balima
International Monetary Fund
Jean-Louis Combes
University Clermont Auvergne
Alexandru Minea*
University Clermont Auvergne Carleton University
Address correspondence to: Alexandru Minea, Université Clermont Auvergne, CNRS, IRD, CERDI, F-63000 Clermont-Ferrand, France; e-mail:


We examine the effect of sovereign credit default swaps (CDS) trading initiation on the occurrence of sovereign debt crises (SDC). Estimations on a large sample of 141 countries for 1980–2013 reveal that, by affecting the fiscal stance, CDS initiation increases by around 1.5 percentage points on average the probability of SDC in countries with CDS compared to the other countries. This result holds for different robustness tests and is found to be stronger for developing countries, for countries with initial lower creditworthiness, and when the degrees of central bank independence and public sector transparency are low. Consequently, compared to existing work emphasizing favorable effects, CDS trading initiation is found to have adverse effects, by increasing the occurrence of SDC. These opposite effects should fuel the literature on measuring the consequences of CDS trading initiation, and its design and implementation from a policy perspective.

© Cambridge University Press 2018

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We are particularly grateful to Blake Phillips for sharing his database. We thank Makram El-Shagi and two anonymous referees for valuable comments on a previous version. We are indebted to Xavier Debrun, Jerzy Konieczny, Camelia Turcu, Marcel Voia, and participants at the 3rd HenU/INFER Workshop on Applied Macroeconomics (Kaifeng, China) and the RCEA Macro-Money-Finance Workshop “Advances in Macroeconomics and Finance” (Rimini, Italy) for helpful remarks. We thank the ANR (Agence Nationale de la Recherche) for their financial support through the “Grand Emprunt” and the LABEX IDGM+ (ANR-10-LABX-14-01) mechanism. Usual disclaimers apply.


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