Sovereign Defaulters: Do International Capital Markets Punish Them?

We study empirically if countries that default on their debt experience a reduction in their capital inflows as suggested by the literature. Our data contains information on (i) the defaulter countries and their creditors and (ii) bilateral foreign direct investment (FDI) flows. With this we can study how FDI flows are affected by sovereign default distinguishing among those coming from defaulters' creditor countries and others. According to our estimations, this distinction is crucial since the decline of FDI inflows after default is markedly concentrated on those flows originating in defaulters' creditor countries. The decay in FDI flows is higher in the years more proximate to the default date and for countries that have defaulted more times. We do not find evidence that countries shut their doors to defaulters' investment abroad, which is also a punishment suggested in the literature.