Default Dynamics: The Influence of Regime Type on Default Choice

• In Event: Politics of Sovereign Borrowing

Abstract

How does regime type influence when and how governments defaults? According to the literature, autocracies that are reliant on food imports and democracies are the most likely to accumulate and default on high amounts of debt. However, using newly released World Bank sovereign debt data, I argue and find that democracies are more likely to default on smaller amounts of debt than autocracies even when taking creditor type into account. In contrast to autocracies, leaders of democracies require only temporary breathing room to navigate their way to the next election, making them more inclined to default more frequently on smaller amounts. Democracies may default on smaller amounts of debt more frequently due to the political cycle. Elected officials in democracies are often under pressure to deliver short-term economic results to maintain their electoral support, which might lead to partial defaults to quickly alleviate financial stress. Furthermore, due to the presence of checks and balances, democracies are less likely to default on IMF loans than autocratic regimes. Instead, democracies are more likely to default on bonds, bank loans, and trade credits than their autocratic counterparts. Autocracies might not feel the same pressure to adhere to short-term electoral cycles and therefore may approach default decisions with a longer-term perspective, potentially leading to larger but less frequent defaults and are more likely to default on IMF loans.

Overall, I expect democracies to be more likely to make more frequent but smaller defaults on their sovereign debt, typically opting to default on obligations other than those held by the IMF. In contrast, I expect autocracies to default on their debt less often, yet when such events occur, the defaults are likely to be of a larger scale and commonly encompass debt owed to the IMF. To support these arguments, I use newly released World Bank sovereign debt data. This project ties into broader themes in political economy, such as the influence of political structures on economic policy decisions, the impact of debt on national economic health, and the interplay between domestic politics and international finance.

Author

• Monica Widmann, University of California, Los Angeles