No Pay, No Debt: Domestic Costs of Sovereign Defaults

This paper investigates the domestic economic consequences of sovereign defaults by analyzing their impact on key macroeconomic variables, including GDP per capita, consumption, government expenditure, investment, exports, imports, unemployment, and inflation. Using the Synthetic Control Method (SCM), the study constructs counterfactual scenarios for defaulting countries to estimate the effect of defaults on economic outcomes. The results indicate that sovereign defaults generally have persistent negative effects, especially on GDP per capita, investment, and trade, with the adverse impacts often starting before the default due to anticipation effects. However, some countries experienced effects that challenge standard intuition. Results for unemployment are mixed and effects on inflation are inconclusive. These findings highlight complex and heterogeneous dynamics around sovereign defaults. While SCM is valuable, anticipation effects and data limitations motivate further methodological refinements and country–specific analyses.