Resolving Sovereign Debt Crises: The Role of Political Risk

Arbeitspapier

Sovereign defaults are bad news for investors and debtor countries, in particular if a default becomes messy and protracted. Why are some debt crises resolved quickly, in a matter of months, while others take many years to settle? This paper studies the duration of sovereign debt crises based on a new dataset and case study archive on debt renegotiations between governments and foreign banks and bondholders. Using Cox proportional hazard models, I find that domestic political instability (‘political risk’) is a significant predictor of negotiation delays, after controlling for macroeconomic conditions. Government crises, resignations, and street protests are particularly disruptive for a quick settlement process. Overall, the evidence suggests that debtor countries often lack the political ability to resolve a debt crisis. Governments in turmoil are unlikely to exit a default quickly.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 7161

Classification and Topics

• Classification: Wirtschaft ; International Lending and Debt Problems ; International Conflicts; Negotiations; Sanctions ; National Debt; Debt Management; Sovereign Debt
• Subject: sovereign default ; crisis resolution ; political economy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Trebesch, Christoph
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2018

Further information

• Handle: http://hdl.handle.net/10419/185359
• Last update: 10.03.2025, 11:45 AM CET