Sovereign Debt Default Research Articles

Sovereign default and FDI transactions: Evidence from Argentina

This paper investigates the effect of sovereign debt default on foreign direct investment (FDI) transactions by US firms into Argentina following the Argentine sovereign default in 2019–20. Using the synthetic control approach, we find that the number of FDI transactions decreased by approximately 60% after the Argentine default with a particularly pronounced decline in the non-manufacturing sector. By examining the changes in the number of transactions, we provide a more precise picture of the cost of sovereign default, capturing the FDI activity of small firms better.

Perceptions of Stakeholders on the Financial and Economic Crisis in Lebanon: An In-depth Analysis

Abstract This study examines Lebanon’s enduring financial and economic crisis, exacerbated by economic challenges, the COVID-19 pandemic, and the Port of Beirut explosion. With over 80 % currency devaluation due to sovereign debt default, the crisis has intensified poverty and unemployment, compounded by political turmoil. Using survey data from 178 stakeholders, experts, and academics, this research explores the intricate drivers of Lebanon’s crisis and offers insights for policymakers. Employing quantitative methods, it uncovers the intertwined role of financial mismanagement, government failures, mounting public debt, financial engineering techniques, and political instability in driving the crisis. Recommendations emphasize prudent financial practices, sound governance, and policy interventions. This study sheds light on Lebanon’s complex financial and economic challenges with data-backed perspectives from diverse stakeholders, providing valuable insights for management practitioners and scholars navigating crises in tumultuous environments. It aims to contribute to the management discourse, equipping stakeholders with actionable strategies for addressing and preventing similar crises. It also explores the interplay between stakeholder perspectives and the determinants of the financial crisis in Lebanon. It delves into the interconnected nature of the crisis and demonstrates how stakeholders from various sectors and backgrounds mirror the factors identified in the literature.

Economic sanctions and sovereign debt default

This paper analyzes the effect of US economic sanctions on sovereign debt default across 118 developing countries from 1980 to 2018. We use entropy balancing method, and provide robust evidence that US sanctions increase sovereign debt default in the targeted states. This finding withstands several robustness tests, including alternative specifications and databases, and alternative estimation methods. The results also reveal some heterogeneity depending on the type of sanctions (for example, trade versus financial sanctions), on whether they are imposed unilaterally or multilaterally, on the severity of the sanctions, on the geographical distance from the United States, the time since sanctions were imposed, and some structural characteristics. In addition, we find that the development of cryptocurrencies reduces the effect of sanctions, and that failed sanctions have a greater effect on default. The compositon effect based on the type of debt in default shows that the effect of US sanctions is only observed on the default on external debt and not on that of internal debt. Next, we identify three main channels through which sanctions trigger sovereign risk; namely economic growth contraction, the occurrence of banking crisis and reduced access to international financial market. Finally, we explore the effect of other sanctions, notably those of the European Union and the United Nations, and find that these sanctions also raise the probability of sovereign debt default.

Sovereign debt and sovereign risk: a systematic review and meta-analysis

ABSTRACT This paper presents a panoramic overview of sovereign risk research. Based on 143 top papers and 2343 mainstream papers retrieved, bibliometric analysis and content analysis are combined to provide insight into the authors, papers, and research themes from 1991 to 2022. First, we identify the leading authors in sovereign risk research and examine their research field by analysing their cooperation networks and representative papers. By drawing upon the citation network, we identify important papers with high degrees, which means they are cited in more articles, and analyse their content. Then, by drawing keyword co-occurrence network and word cloud and analysing theme structure, four research streams are identified, including the pricing of sovereign debt, sovereign debt default, contagion between sovereign debt and the financial market, and sovereign ratings and their impacts. Based on the existing research trends and streams and considering the demand-driven characteristics of sovereign risk research, this study provides directions for future research.

Debts unravelled: trust law’s unbiased approach to resolving sovereign defaults

Abstract Sovereign debt defaults have long ignited debate in international finance as debtors, creditors, and global entities wrestle with clashing interests. Trust law emerges as a fair and objective method, with trusts formed to manage and disburse funds for creditor advantage. This article investigates trust law’s relevance to sovereign debt defaults, presenting case studies and examining its impartiality. The article assesses trust law’s pros and cons, proposing its future use as an auxiliary tool alongside debt restructuring. In essence, the article thoroughly scrutinises trust law’s function in tackling sovereign debt defaults, highlighting its significance as a just and unbiased mechanism.

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

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.

История одного национального дефолта

This is a contribution to the discussion forum "Conceptualizing Society after the Modern Territorial State and Nation." Ilya Gerasimov uses the case of the 1998 Russian financial crisis to introduce the modern sociological model of the nation-state's systemic demise. Known in Russian primarily as "the default" – a shorthand for "sovereign debt default" – the 1998 financial crisis was first and foremost a crisis of trust in the government and its economic policy. Economics experts have traced the roots of the default all the way to 1991 and the origins of the sovereign Russian Federation. Gerasimov suggests that the 1998 crisis was the first stage in the Russian national project's fundamental default on its promise to build a "normal" democratic state, so that Russia's invasion of Ukraine in 2022 was only the culmination of that systemic failure. From the very beginning, the problem was not the project's Russianness but its normative "normalness."

A study of sovereign risk and debt defaults: evidence from Asian economies

A study of sovereign risk and debt defaults: evidence from Asian economies

Does it matter how central banks accumulate reserves? Evidence from sovereign spreads

There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation affects country risk. We first present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We confirm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations.

Routine Crisis: An Ethnography of Disillusion

ABSTRACTIn Routine Crisis, Sarah Muir explores the prevailing sentiment within the Argentine middle‐class that not only have things gone wrong with their country, but that they will never be put right again. The book tracks the “radical negativity” of the middle‐class in the wake of the country's millennial economic crisis. This crisis entailed an economic collapse, the largest sovereign debt default in world history, sky‐rocketing rates of unemployment and poverty, and, as a result of currency devaluation, the over‐night loss of lifetimes’ worth of savings. For the Argentine middle‐class, Muir tells readers, these events were experienced not only as a financial loss, but as a loss of hope in the future; they crystalized the repeat political and economic crises through which Argentina had passed during the twentieth century and reframed them as proof that the country would never live up to its modernist dreams. While the political class bore the brunt of the blame during the civil unrest of December 2001, when crowds gathered in Argentina's major cities to demand “Que se vayan todos” (Out with all of them), Muir is attentive to the way middle‐class Argentines consider themselves complicit in the corruption that led to the crisis they were living through. Muir suggests that her interlocutors had come to see Argentina as a pathologically corrupt society, a stance that “inverted the familiar idea that national history is a teleological progression toward a better future” (93). In Routine Crisis, Muir not only captures a sensibility of hopelessness, but also lucidly explicates the social and political implications of the middle‐class embrace of disillusion as a historical outlook.

Predictability of sovereign CDS: permutation entropy method

With the expansion of sovereign debt default swap (CDS) market, gradually attention has been paid to sovereign CDS forecasting research. This paper compares the predictability of sovereign CDS between China and USA by using the permutation entropy approach and G(M) test. Besides, sliding window technique has been applied for time-varying predictability analysis. The empirical results suggest that USA sovereign CDS is more predictable than China, and the predictability of USA sovereign CDS has changed more over time. The research result provides guidance for the sovereign CDS forecast modelling.

An Apocalypse Foretold: Climate Shocks and Sovereign Defaults

Climate change poses an existential threat to the global economy. While there is a growing body of literature on the economic consequences of climate change, research on the link between climate change and sovereign default risk is nonexistent. We aim to fill this gap in the literature by estimating the impact of climate change vulnerability and resilience on the probability of sovereign debt default. Using a sample of 116 countries over the period 1995–2017, we find that climate change vulnerability and resilience have significant effects on the probability of sovereign debt default, especially among low-income countries. That is, countries with greater vulnerability to climate change face a higher likelihood of debt default compared to more climate resilient countries. These findings remain robust to a battery of sensitivity checks, including alternative measures of sovereign debt default, model specifications, and estimation methodologies.

How fiscal rules can reduce sovereign debt default risk

The economic literature has been forceful on the role of fiscal institutions in attenuating economic fluctuations. In particular, the implementation of fiscal rules has gained importance in the toolkit of macroeconomic stabilization policies. This paper studies the effect of fiscal rule implementation on sovereign default risk and on the probability of capital flow reversals for a large sample of countries including both developed and emerging market economies. Results indicate that fiscal rules are beneficial for macroeconomic stability, as they significantly reduce both sovereign risk and the probability of a sudden stop in countries that implement them. These results, which are robust to various empirical specifications, have important policy implications specially for countries that have relaxed their fiscal rules in response to the Covid-19 pandemic.

The Tragedy of Transition: Development, Deterioration, Decay. The Case of Hungary, 1990-2020

The essay is about the economic and political development of Hungary in the last 30 years. It can be neatly divided into three periods which coincide with the calendar decades almost perfectly. After the collapse of the communist system, the first period constituted a glorious decade in development: the first two governments implemented almost all indispensable structural reforms required for a successful transition. After the financial stabilization in 1995, a consistent macroeconomic policy was applied, leading to export and investment-driven, hence sustainable economic growth. The next decade brought deterioration: reforms were stalled, and a sharp turn to consumption-led and debt-fuelled growth resulted in twin deficits which, by the time of the Great Recession, almost triggered a sovereign debt default. After a short period of successful financial stabilization, a populist-nationalist government came to power in 2010. A decade of decay set in: reversal of structural reforms, nationalization, monopolization, protectionism, market-distorting taxation and subsidization, state capture by a corrupt oligarchy, together with inconsistent macroeconomic policy. In addition, the self-styled „illiberal regime” of Viktor OrbĂĄn demolished the rule of law and all institutions representing checks and balances in a democracy. Corruption was elevated to the level of official government policy. With the help of the huge amount of subsidies coming from the EU, the regime maintained financial equilibrium and achieved significant growth during the time of global boom between 2014-2019. However, given the fact that private investments and productivity stay rather low in the non-tradable sector of the domestic economy, real convergence to Western efficiency and living standards remain elusive. Today Hungary constitutes a primary example of an economy pushed into a typical middle-income trap by its oligarchic and authoritarian regime. It also proves that transition reforms are all reversible; institutions are fragile. Restoration of the rule of law and democracy seems to be an indispensable prerequisite for convergence and development.

Convergence in Sovereign Debt Defaults: Quantifying the Roles of Institutions

AbstractIn this study, using an ex ante measure, we examine the convergence patterns in sovereign defaults among 101 developing countries for the period from 1990 to 2015. We employ the club convergence algorithm to determine convergence paths across countries and examine the role of institutions in shaping the observed convergence patterns. The merging of clubs reveals three distinct convergent sub‐clubs. Countries in each of these sub‐clubs tend to exhibit a similar pattern of long‐run convergence in cases of sovereign debt default. Countries with better institutions are less likely to belong to a club with greater risks of sovereign defaults by 7% points. Unlike trade openness, levels of external debt, inflation and current account balance increase the probability of default in these economies.

A study of sovereign risk and debt defaults. Evidences from Asian economies

A study of sovereign risk and debt defaults. Evidences from Asian economies

Does it Matter How Central Banks Accumulate Reserves? Evidence from Sovereign Spreads

There has been substantial research on the bene ts of accumulating foreign reserves, but less on the relative merits of how these reserves are accumulated. In this paper we explore whether the form of accumulation a ects country risk. We rst present a model of endogenous sovereign debt defaults, where we show that reserve accumulation through the issuance of debt contingent on local output reduces spreads in a way that reserve accumulation with foreign borrowing does not. We con rm this model prediction when taking the theory to the data. These results suggest that attention should be placed on the way reserves are accumulated, a distinction that has important practical implications. In particular, our results call into question the benefits of programs of reserves strengthening through external debt such as those typically implemented by multilateral organizations.

Life after default. Private and official deals

This paper studies the relationship between sovereign debt default and annual GDP growth distinguishing between private and official deals. Using the Synthetic Control Method to analyze 23 official and private defaulters from 1970 to 2017, we find that private defaults generate output losses both during the crisis and persisting over time. Conversely, official defaulters do not show a permanent drop in GDP per capita, neither during the crisis nor in its aftermath. Using panel data analysis to control for the creditors’ loss (haircut), we confirm that official and private defaults may have different effects on GDP growth.

Elements of Sovereign-Debt Default in the MENA Region

In the past half-century, the MENA region has witnessed several political uproars, varying between internal instability and conflict to external assaults and disputes. Studies conducted on developing countries have shown that political risk factors have, one way or another, rushed the governments’ decision to default on their debt. The purpose of this study is to examine the significance of the determinants of sovereign debt default. The aim here is to find the correct set of independent variables, whose effect is significant and are agreed upon generally in the literature. The empirical study is a panel data that samples 35 years 1984-2018 for all MENA countries. From the political perspective, I find that corruption and cohesion are the factors that stand behind sovereign debt default. From the economic standpoint, inflation and debt to GDP ratio are significant and positively related indicators to sovereign debt defaults. Whereas, trade openness is significant and negatively related. Moreover, the results reveal that GDP growth is insignificant, this finding contradicts the literature of the determinants of sovereign debt.

An Apocalypse Foretold

Climate change poses an existential threat to the global economy. While there is a growing body of literature on the economic consequences of climate change, research on the link between climate change and sovereign default risk is nonexistent. We aim to fill this gap in the literature by estimating the impact of climate change vulnerability and resilience on the probability of sovereign debt default. Using a sample of 116 countries over the period 1995–2017, we find that climate change vulnerability and resilience have significant effects on the probability of sovereign debt default, especially among low-income countries. That is, countries with greater vulnerability to climate change face a higher likelihood of debt default compared to more climate resilient countries. These findings remain robust to a battery of sensitivity checks, including alternative measures of sovereign debt default, model specifications, and estimation methodologies.