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Economic Quarterly

Third Quarter 2010

The Politics of Sovereign Defaults

Juan Carlos Hatchondo and Leonardo Martinez

In this article, we study the interplay between political factors and default decisions. First, we survey two branches of theoretical studies. One shows that governments may be willing to repay their debt because it is in the best interest of local agents with political power. The other one discusses how political turnover affects sovereign default risk. Second, we describe a large body of empirical studies that find evidence of the influence of political stability and other characteristics of a political system on default risk. Finally, we examine the role of political factors in five recent default episodes.

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