Non-technical summary of ESM Working Paper 60 "Sovereign defaults at home and abroad"

The paper builds a uniquely detailed database, containing all sovereign defaults on private sector creditors that occurred from 1980 to 2018. The database provides a systematic comparison of sovereign defaults involving domestic and external public debt, which is defined according to the market of issuance (i.e. either issued externally or domestically). 

The analysis shows that domestic defaults and restructurings are nowadays as frequent as external ones. It also highlights that selective defaults are the norm as governments often discriminate between domestic and external debt. Additionally, we document that domestic debt restructurings normally proceed faster, involve smaller volumes of debt, and are associated with larger creditor losses than external ones. In term of restructuring strategy, we document that maturity extensions and amendments to the coupon structure are the most frequent forms of restructurings both for domestic and external debt. Face value reductions are rare, and feature more frequently in external restructurings. 

The results also show that the macro-financial environment surrounding domestic and external defaults differs markedly. Growth falters around both domestic and external restructurings. Yet, while domestic defaults happen at times of financial instability, characterised by low private credit growth and a high likelihood of banking crises, external restructurings happen at times of significant external adjustments, characterised by trade surpluses and capital flight.

The paper also documents differences in the political and geo-economic landscape. External defaults tend to happen in periods of heightened political tensions, are less likely when moderate parties are in power, and when political constraints are tighter. Domestic defaults are instead more likely when political constraints are tighter, and governments’ ideologies shows no relation to them. Finally, the paper shows that domestic and external defaults are dealt with using different elements of the international financial architecture. While IMF programmes often overlap with domestic defaults but not external ones, debt restructurings of official debt often accompany external defaults but not domestic ones.