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How does private foreign borrowing affect the risk of sovereign default in developing countries?

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Author Info
Oya Celasun () (International Monetary Fund)
Philipp Harms () (RWTH Aachen University, Study Center Gerzensee)

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Abstract

We argue that increased foreign borrowing by the private sector reduces the risk that a developing country's government defaults on its foreign debt. We present a simple model in which private foreign borrowing reflects a surge of private entrepreneurship. A larger "entrepreneurial class" raises the political costs of default and reduces the government's incentive to deny repayment. The results of our empirical analysis support the model's key hypothesis.

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File URL: http://www.szgerzensee.ch/fileadmin/Dateien_Anwender/Dokumente/working_papers/wp-0704.pdf
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Publisher Info
Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 07.04.

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Length: 43 pages
Date of creation: Apr 2007
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Handle: RePEc:szg:worpap:0704

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  1. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies: How Much is thePrivate Sector Affected?," IMF Working Papers 09/29, International Monetary Fund. [Downloadable!]
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This page was last updated on 2009-11-20.

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