Strategic Sovereign Defaults under International Sanctions
AbstractSanctions induce political instability. We present a model where sanctioned regimes may decide to repudiate their public debts in order to keep internal support. To be effective, this strategy requires the share of foreign debt to be larger than the minimum quota of population which is needed for regime support. Combining the data we highlight that more than a third of all sovereign debt crises in the 1970-2001 period are connected to an international sanction episode. To rule out endogeneities, we propose an innovative instrumental variable based on foreign policy cycles. Results confirm that sovereign defaults reduce sanctions' destabilizing impact. When the scope for internal financial transfers is particularly narrow, debt repudiation releases resources for public spending, invalidating chances of overthrow. Lastly, we report evidence of sizeable anticipation effects which contradict the enforcement theory: high chances of receiving sanctions in the future imply a current 20% rise in probability of strategic default.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy in its series ISLA Working Papers with number 42.
Length: 19 pages
Date of creation: Dec 2011
Date of revision:
Contact details of provider:
Postal: via Sarfatti, 25 - 20136 Milano - Italy
Web page: http://www.isla.unibocconi.it/
sovereing debt default; strategic default; sanctions;
Find related papers by JEL classification:
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
- D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-03 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew K. Rose & Mark M. Spiegel, 2002.
"A gravity model of sovereign lending: trade, default and credit,"
Working Paper Series
2002-09, Federal Reserve Bank of San Francisco.
- Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
- Andrew K. Rose & Mark M. Spiegel, 2002. "A Gravity Model of Sovereign Lending: Trade, Default and Credit," NBER Working Papers 9285, National Bureau of Economic Research, Inc.
- Nouriel Roubini & Paolo Manasse, 2005.
""Rules of Thumb" for Sovereign Debt Crises,"
IMF Working Papers
05/42, International Monetary Fund.
- Martinez, Jose Vicente & Sandleris, Guido, 2011.
"Is it punishment? Sovereign defaults and the decline in trade,"
Journal of International Money and Finance,
Elsevier, vol. 30(6), pages 909-930, October.
- Jose Vicente Martinez and Guido Sandleris, 2008. "Is it Punishment? Sovereign Defaults and the Decline in Trade," Business School Working Papers 2008-01, Universidad Torcuato Di Tella.
- Michael Tomz & Mark L. J. Wright, 2007.
"Do Countries Default in "Bad Times" ?,"
Journal of the European Economic Association,
MIT Press, vol. 5(2-3), pages 352-360, 04-05.
- Michael Tomz & Mark L. J. Wright, 2007. "Do Countries Default In "Bad Times"?," CAMA Working Papers 2007-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Michael Tomz & Mark L. J. Wright, 2007. "Do countries default in “bad times”?," Working Paper Series 2007-17, Federal Reserve Bank of San Francisco.
- Edwards, Sebastian, 1984. "LDC Foreign Borrowing and Default Risk: An Empirical Investigation, 1976-80," American Economic Review, American Economic Association, vol. 74(4), pages 726-34, September.
- Sebastian Edwards, 1984. "LDC's Foreign Borrowing and Default Risk: An Empirical Investigation," NBER Working Papers 1172, National Bureau of Economic Research, Inc.
- Gary Clyde Hufbauer & Jeffrey J. Schott & Kimberly Ann Elliott, 1990. "Economic Sanctions Reconsidered: 2nd Edition," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 82.
- Eduardo Borensztein & Ugo Panizza, 2009.
"The Costs of Sovereign Default,"
IMF Staff Papers,
Palgrave Macmillan, vol. 56(4), pages 683-741, November.
- Eduardo Borensztein & Ugo Panizza, 2006.
"Do Sovereign Defaults Hurt Exporters?,"
Research Department Publications
4447, Inter-American Development Bank, Research Department.
- Federico Sturzenegger & Jeromin Zettelmeyer, 2007. "Debt Defaults and Lessons from a Decade of Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262195534.
- Chang, Roberto, 2007.
"Financial crises and political crises,"
Journal of Monetary Economics,
Elsevier, vol. 54(8), pages 2409-2420, November.
- Mitchener, Kris James & Weidenmier, Marc D., 2010. "Supersanctions and sovereign debt repayment," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 19-36, February.
- Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
- Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "The economics of sovereign defaults," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 163-187.
- Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-98, September.
- Cole, Harold L & Kehoe, Patrick J, 1998. "Models of Sovereign Debt: Partial versus General Reputations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(1), pages 55-70, February.
- Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stefano Riela).
If references are entirely missing, you can add them using this form.