Why Do Governments Default, and Why Don't They Default More Often?

46 Pages Posted: 30 May 2013

See all articles by Willem H. Buiter

Willem H. Buiter

Citigroup New York; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Columbia University

Ebrahim Rahbari

Citigroup London

Date Written: May 2013


This paper considers the economic and political drivers of sovereign default, focusing on countries rich enough to render sovereign default a ‘won’t pay’ rather than a ‘can’t pay’ phenomenon. Unlike many private contracts, sovereign debt contracts rely almost exclusively on self-enforcement rather than on third-party enforcement.

Among the social costs of sovereign default are contagion and concentration risk, both within and outside the jurisdiction of the sovereign, and ‘rule of law externalities’. We consider illiquidity as a separate trigger for sovereign default and emphasize the role of lenders of last resort for the sovereign.

Not only do political economy factors drive sovereign insolvency, they also influence the debt sustainability analyses performed by national and international agencies.

We consider it likely that the absence of sovereign defaults in the advanced economies since the (West) German defaults of 1948 and 1953 until the Greek defaults of 2012 was a historical aberration that is unlikely to be a reliable guide to the future.

Keywords: fiscal sustainability, intertemporal budget constraint, political economy., solvency, sovereign default, strategic default

JEL Classification: E62, E63, F34, F41, G01, G18, H26, H63

Suggested Citation

Buiter, Willem H. and Rahbari, Ebrahim, Why Do Governments Default, and Why Don't They Default More Often? (May 2013). CEPR Discussion Paper No. DP9492. Available at SSRN: https://ssrn.com/abstract=2271943

Willem H. Buiter (Contact Author)

Citigroup New York

Citigroup Global Markets Inc
388 Greenwich Street
New York, NY 10013
United States
+12128162363 (Phone)
+12128168970 (Fax)

HOME PAGE: http://willembuiter.com/

Centre for Economic Policy Research (CEPR)

United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

HOME PAGE: http://www.CESifo.de

Columbia University ( email )

420 West 118th Street
New York, NY
United States

Ebrahim Rahbari

Citigroup London ( email )

33 Canada Square
London, E14 5LB
United Kingdom

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