Are Sovereign Defaults (Partly) Bad Luck?

Colin Ellis

World Economics, 2023, vol. 24, issue 2, 19-30

Abstract: When sovereigns default, the consequences can be disastrous. Domestic banks and companies often suffer alongside their governments, and the sovereigns themselves face high risks of re-defaulting. One contributor to default is often disappointing growth – examining a sample of defaults since 2000, growth has typically fallen short relative to independent forecasts made both one year and two years prior to default. Textual analysis of those errors finds regular attribution of this weak growth to exogenous shocks, beyond the control of the governments that default. This supports the hypothesis that, in part, sovereign defaults reflect bad luck. Finally, there are signs of a relationship between the extent of growth falling short of forecasts and the losses investors suffer in the event of default. Unsurprisingly, larger growth shortfalls are typically associated with higher losses.

Date: 2023
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