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

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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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Bibliographic 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
Date of revision:
Handle: RePEc:szg:worpap:0704

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Cited by:
  1. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies," IMF Working Papers, International Monetary Fund 09/29, International Monetary Fund.
  2. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers, International Monetary Fund 12/203, International Monetary Fund.
  3. Hallak, Issam, 2013. "Private sector share of external debt and financial stability: Evidence from bank loans," Journal of International Money and Finance, Elsevier, Elsevier, vol. 32(C), pages 17-41.

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