Explanation:
Empirical research shows that a sovereign default often leads to a significant and long-lasting reduction in bilateral trade between the defaulting country and its trading partners. This decline can be driven by a variety of factors including trade retaliation, a reduction in the availability of trade credit, and a general loss of confidence and inhibition on cross-border investment activities. Consequently, Option C is the correct answer.
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Q.49 Long-term economic repercussions of a sovereign default can span beyond immediate financial markets. How might sovereign defaults affect bilateral trade between the defaulting country and its trading partners?
A
Sovereign defaults generally lead to a strengthening of bilateral trade due to renegotiated terms and improved competitiveness.
B
Bilateral trade typically remains unaffected by sovereign defaults as trade agreements are insulated from sovereign credit events.
C
Trade retaliation and inhibitions on investment activities can lead to a significant reduction in bilateral trade following a default.
D
Defaults result in increased bilateral trade as international partners offer more favorable trade terms to support economic recovery.
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