n the Repudiation of Sovereign Debt: Sources of Stability and Risk

John A. Conybeare, University of Iowa

Abstract

Sovereign debt problems are not new. High risk loans are a rational portfolio strategy and the system has successfully weathered many such crises over the past 500 years. Sovereign debt has always been a question of political willingness to repay rather than solvency. Most analyses focus on the incentives to repay that result from loss of reputation and from sanctions. The importance of political will and sanctions (not reputation) suggests that more attention should he paid to domestic politics in debtor countries, The domestic distributional effects of borrowing, stabilization plans and repudiation may be concentrated in such a way that politically influential sectors gain from default even if the country as a whole suffers a net loss. Unfortunately, democratic reforms in developing countries may induce the exercise of such power, providing a feature of the current debt crisis that may exhibit some historical uniqueness.