Why Are There Serial Defaulters? Evidence from Constitutions

Abstract

Presidential democracies were 4.9 times more likely than parliamentary democracies to default on external debts between 1976 and 2000. In this article I argue that the explanation for the serial defaults by a number of sovereign borrowers lies in their constitutions. Ceteris paribus, parliamentary democracies are less likely than presidential democracies to default on their liabilities because the confidence requirement creates a credible link between economic policies and the executive's political survival. This link tends to strengthen the repayment commitment when politicians are opportunistic. I show that this effect is large in the contemporary world even when the comparison is restricted to countries that are similar in terms of colonial origin, geography, and economic variables. Since a country's form of government is typically chosen at the time of independence and is highly persistent over time, constitutions can explain why debt policies in developing countries are related to individual histories.

Sovereign default, interest rates and political uncertainty in emerging markets

“…Consistently, Kohlscheen (2006) finds that higher political turnover per se increases the likelihood of sovereign default. Using probit regressions for 59 countries in the 1990s he finds the executive turnover to be a statistically significant variable after controlling for macroeconomic and other political variables.…”

Sovereign defaults

“…Dates of defaults AGO 1996, 1997, 2002ARG 2001,2002,2007,2009BOL 1996,1997BRA 2002CAF 1996,1997,2002,2007,2009DOM 1996,1997DZA 1996ECU 1999HND 1996,1997,2002,2007,2009IDN 1997,2002KEN 1996,1997,2002LKA 1996MMR 2002,2007,2009NGA 2001NIC 1996,1997,2002,2007,2009PAN 1996PER 1996,1997PRY 2003RUS 1996,1997…”

“…Dates of defaults AGO 1996, 1997, 2002ARG 2001,2002,2007,2009BRA 2002DOM 1996,1997ECU 1999IDN 1997LKA 1996RUS 1998TUR 2001VEN 1998ZWE 2006 Note: Countries that have not defaulted between 1996 and 2010 are not reported in this Note: In column 6, the sample is restricted to those observations used in column 4, so that the comparison between columns 4 and 6 reflects the implication of the inclusion of the share of debt in foreign currency as a control, and the comparison between columns 5 and 6 reflects the implication of the sample reduction. Source: Reinhart and Rogoff (2009).…”

“…For instance, inflation stability can reflect sound monetary institutions. Kohlscheen (2007) finds evidence that an explanation for the serial defaults lies in the constitution: parliamentary democracies default less. Alberola-Ila et al (2016) show that fiscal rules can reduce macroeconomic instability as they are associated with a more stability-oriented fiscal policy.…”

Sovereign debt disputes: A database on government coerciveness during debt crises

“…These are grouped into two broad categories: (i) Four "Indicators of Payment Behavior" which capture government actions that have a direct impact on financial flows towards international banks or bondholders, and (ii) Five "Indicators of Negotiation Behavior" which capture government negotiation patterns and rhetoric. 1 S&P's annual list has been used by many researchers, including Borensztein and Panizza (2009), Gelos et al (2011), Manasse et al (2003, Kohlscheen (2007), Reinhart et al (2003) and Van Rijckeghem and Weder, (2009). 2 Authors relying on this list in recent work include Arteta and Hale (2008), Marchesi (2003) and Saiegh (2005). 3 Another approach, by Pescatori and Sy (2007), uses bond spreads to define debt crises.…”