Determinants of sovereign defaults

Abstract

We study major sovereign defaults from 1970 to 2010 using an advanced duration analysis method. Descriptive analysis of the data indicates a cyclical nature of these defaults over a longer period. Regression results highlight the importance of the international monetary conditions as the volatilities of US treasury bills rates and USD-denominated LIBOR exert significant impacts on defaults. Political uncertainty increases the probability of default. Export (import) growth reduces (increases) the probability of default. Similarly, a 1% increase in inflation would increase the probability of defaults by 7%. Higher debt/GDP ratio is also linked to higher probability of default. A 1% increase in external debt would lead to a five to 7% increase in the probability of default. Higher GDP per capita reduces the probability of default. A previous banking crisis is linked to higher chances of sovereign defaults. Further analysis of entry into (out of) sovereign defaults indicates that higher US treasury rates would initiate sovereign defaults and would make it difficult for countries to come out of default. The same is true for central government debt/GDP, higher current account deficit and exchange rate volatility.