Research and Data

with Sebastian Horn

Abstract: Sovereign defaults are conventionally believed to trigger outright exclusion from international capital markets. We challenge this notion using a novel loan-level dataset of all 54,881 loans and bonds issued by 120 emerging markets and developing economies to private external creditors since 1970. We show that sovereigns almost always retain partial market access, even during years of outright default. Instead, defaults are costly because they erode a sovereign's creditor base. We find that defaulters rely on a narrower set of creditors, enter into fewer and smaller loan agreements and experience a contraction in new credit volumes of more than 50 percent that persists for over a decade. To rationalize these patterns, we build a model with an endogenous creditor structure and illustrate how default-induced, reputation-driven creditor attrition has negative long-run effects on borrowing conditions and debt-carrying capacity.