Abstract
The growth in sovereign debt that began during the Second World War has continued through peace, war, recession, and prosperity. Fondness for state borrowing has spread from developed to developing countries, and from market-based economies to socialist ones, which then became highly indebted “economies in transition.” The difficulties of servicing this debt, particularly by developing and transition borrowers, have triggered crises in financial institutions, bond markets, and currency exchanges. The continued development of highly liquid portfolio capital markets, particularly in developing and transition countries, has had a multiplier effect. This effect stems from the possibility that a sovereign default could trigger a stampede of disinvestment, or what economists call an investor “rush for the exits.” Fears of possible “contagion effects,” where a single sovereign default leads to a “rush for quality” domino effect as investors move capital to more secure venues, have made economists even more concerned with the potential multinational effects of the default of a single sovereign.
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