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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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  • Oya Celasun & Philipp Harms, 2007. "How does private foreign borrowing affect the risk of sovereign default in developing countries?," Working Papers 07.04, Swiss National Bank, Study Center Gerzensee.
    • Handle: RePEc:szg:worpap:0704
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    Cited by:

    1. Christoph Trebesch & Mr. Michael G. Papaioannou & Mr. Udaibir S Das, 2012. "Sovereign Debt Restructurings 1950-2010: Literature Survey, Data, and Stylized Facts," IMF Working Papers 2012/203, International Monetary Fund.
    2. Hallak, Issam, 2013. "Private sector share of external debt and financial stability: Evidence from bank loans," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 17-41.
    3. Christoph Trebesch, 2009. "The Cost of Aggressive Sovereign Debt Policies: How Much is theprivate Sector Affected?," IMF Working Papers 2009/029, International Monetary Fund.

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