Journal Article

Resolving sovereign debt crises: the role of political risk

Author

  • Christoph Trebesch
Publication Date

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 data set 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.

Kiel Institute Expert

Info

JEL Classification
F34; F51; H63
DOI
10.1093/oep/gpy041

Key Words

  • Crisis Resolution
  • political economy
  • Sovereign default

Related Topics