Aitor Erce (Consultant, CERDI)

Aitor Erce  
Independent Consultant. Research & Policy Advisor.  
Research Fellow, CERDI

Coauthors: Enrico Mallucci (Board of Governors of the Federal Reserve System) and Mattia Picarelli (ESM)

Abstract

We systematically compare sovereign defaults on debt issued externally and domestically. Defaults at home and abroad are equally frequent, and governments often default selectively. Compared to domestic defaults, external defaults are larger and take longer to resolve. Both external and domestic defaults are often resolved through maturity extensions and coupon reductions. Face value reductions are infrequent, especially as part of domestic restructurings. Yet, domestic defaults are more punitive, as they are associated with larger creditor losses. We also document that domestic and external sovereign defaults occur in markedly different macro-financial, political and geo-economic environments. Our stylised facts inform a growing theoretical literature concerned with sovereign defaults in the presence of domestic debt markets.

Read the paper (European Stability Mechanism Working Paper Series, 60, 2024)