Sovereign debt defaults

Abstract

This study investigates the determinants of sovereign default risk in 123 developing countries over the period 1970-2012. Adopting an approach distinct from the literature, this paper employs a continuous measure of the accumulated arrears of interest payments and principal repayments on private and official external debt as a proxy for sovereign default. Apart from the importance of the current account balance, short-term debt, credit to the private sector, output, lending interest rate, and the exchange rate, empirical results show that the presence of the HIPC relief program is found to mask a portion of the true effects of the economic and political factors on debt arrears. In addition, in contrast to middle-income countries, political risk exhibits a negative impact on accumulated arrears in low-income countries. Arrears are found to be responsive to lending interest rate only in the middle-income and nonHIPC countries. Moreover, in the HIPC and low-income countries arrears are found to be more sensitive to volatility in the exchange rates. This study recommends that indebted countries: (1) stabilize their exchange rate, (2) rationally manage external debt, and (3) enhance transparency in governmental institutions.