Sovereign Defaults and Trade: External vs. Domestic Creditors

This paper shows that the trade costs of sovereign default depend on the identity of defaulted creditors. Comparing external and domestic defaults on privately held debt across 128 developing countries over 1980–2019, and applying both two-way fixed effects and stacked difference-in-differences estimators,we find that external defaults are associated with large and persistent import contractions, while domestic defaults have smaller and short-lived effects. This asymmetry is concentrated in imports of capital goods and is mirrored by declines in international lending to the private sector and in medium-to-long-term export credit insurance after external, but not domestic, defaults. By contrast, exports do not change significantly after either type of default. The results point to disruptions in cross-border trade finance as a key channel linking external defaults to trade, and highlight creditor composition as a central determinant of default-related trade costs.