The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
We re-assess the view that sovereigns with a history of default are charged only a small
and/or short-lived premium on the interest rate warranted by observed fundamentals. Our reassessment
uses a metric of such a 'default premium' (DP) that is consistent with
asymmetric information models and nests previous metrics, and applies it to a much broader
dataset relative to earlier studies. We find a sizeable and persistent DP: in 1870-1938, it
averaged 250 bps upon market re-entry, tapering to around 150 bps five years out; in 1970-
2011 the respective estimates are about 400 and 200 bps. We also find that: (i) these
estimates are robust to many controls including on actual haircuts; (ii) the DP accounts for as
much as 60% of the sovereign spread within five years of market re-entry; (iii) the DP rises
with market exclusion spells. These findings help reconnect theory and evidence on why
sovereign defaults are infrequent and earlier debt settlements are desirable.