Defaulting Differently: The Political Economy of Sovereign Debt Restructuring Negotiations.

The article examines sovereign debt restructuring negotiations, focusing on how governments’ domestic political constraints influence their negotiation tactics and outcomes, specifically creditor "haircuts"—the percentage of debt losses creditors accept. It conceptualizes debt restructuring as a bargaining game marked by asymmetric information about the government's willingness to repay, which creditors infer imperfectly from political institutions and domestic veto players. The study finds that governments facing multiple domestic veto players are more likely to issue costly public default declarations—explicit announcements of suspension of debt payments—to credibly signal unwillingness to repay, thereby securing larger creditor haircuts. Using data from 25 countries between 1980 and 2009, the analysis shows that public declarations serve as a costly and unifying signal that clarifies government preferences, leading creditors to grant greater debt relief. These findings highlight the importance of political economy and negotiation behavior in understanding sovereign debt outcomes beyond economic fundamentals.