Domestic vs external sovereign debt servicing: an empirical analysis

Abstract

This paper analyzes the incidence of domestic and external debt crises for a sample of 53 emerging economies between 1980 and 2005. Even though there is substantial time variation in the default rates during the period, sovereign default rates for domestic debts are typically lower than those for external debts. The incidence of both types of defaults is explained by means of the estimation of independent and simultaneous limited-dependent variable models. The results show that while there is considerable evidence that external defaults trigger domestic defaults, evidence for the reverse link disappears when default propensities are estimated in a simultaneous equation model. Copyright © 2009 John Wiley & Sons, Ltd.

Selective Sovereign Defaults

“…In this paper we go beyond their descriptive approach and explore the reasons that may push sovereigns to discriminate in one or the other direction.To our knowledge there is no other paper studying residence-based inter-creditor equity during debt restructurings and its dependence on macroeconomic factors. Our explanation for the existence of discrimination among creditors is in contrast with that presented in Kohlscheen (2009) and Van Rijckeghem and Weder (2004) who, using simple dummy indicators, argue that the inclusion of domestic debt in the negotiations relates to the political situation of the country. 7 Furthermore, the various scenarios in which residents appear to have shouldered most of the restructuring e¤ort provide evidence against an assumption commonly held in the recent theoretical literature on sovereign debt restructurings: that in the presence of foreign and domestic debt obligations the sovereign will either give preferential treatment to residents or will not discriminate.…”

“…We should then expect domestic defaults to be less likely under scenarios of both …scal dominance and a large stocks of domestic currency debt. 36 Second, there may be situations in which the government tries to squeeze residents in order to remain current on external obligations. This could be done in various ways.…”

The state dependent impact of bank exposure on sovereign risk

“…In addition, they find panel econometric evidence for sovereign defaults being less likely, the more exposed the domestic banking sector is. Similarly, Kohlscheen (2010) and Van Rijckeghem and Weder (2004) find governments are less likely to default on domestic creditors than foreign ones. Based on this line of reasoning, Engler and Große Steffen (2016) argue that incentives for sovereign default originate in wealth transfers by defaulting on foreign held debt.…”

Incidence and Duration of Fiscal Crises: Macroeconomic Determinants

“…Limited dependent variable probability models are commonly used in crisis incidence analysis (Kruger and Messmacher, 2004;Kraay and Nehru, 2004;Kohlscheen, 2010). These models account for non-linearity between the cause of a crisis and its eruption.…”