Does Increase in Defence Spending Lead to More Risk of Sovereign Debt Defaults?

Abstract

ABSTRACT The objective of this study was to identify the determinants of sovereign debt default for a panel of twenty developing nations over the period 1970 to 2019, specifically focusing on the influence of defence/military spending. This study’s findings indicate that increased military spending has generally reduced default risk in the examined countries, but that excessive military spending, past a certain threshold, can have strong detrimental impacts on the probability of sovereign debt default. Additionally, the findings show that the country’s levels of democracy and foreign currency reserves level are both negatively linked to debt default risk, whereas default history, level of external debt, and short-term debt to reserves ratio are all significantly positively linked to higher default risk. The study suggests that certain countries may wish to evaluate their level of military spending to ensure it is not too high. Alternatively, countries may lower their accrual of external debt from military spending by focusing on domestic arms production, mitigating their risk that way.