Reducing the number and the size of sovereign defaults in the world: Long-term trend or temporary phenomenon?

Abstract

The paper explains the current global trends, which consist in a decrease in both the number and the size of defaults. For this purpose, a new approach to modeling the probability and the size of defaults based on nonlinear models (generalized additive models) has been applied. The obtained empirical estimates confirm the significant nonlinearity of the relationships between factors. Based on the proposed approach, it is possible to detect the disciplinary effect of the rate of increase in interest expenses and confirm the significance of the rate of debt accumulation as a development of previous works. We have found that the main contribution to this trend is made by the institutional factor — government efficiency: the more effective the government is, the better it ensures debt sustainability, reducing both the number of defaults and their size. Another important factor is the soft monetary policy of developed countries. It affects the default size, reducing it, but is not the reason for the decrease in the number (probability) of defaults in the world. Thus, the current trend is long-term and shows the progress of some countries and international organizations in reducing risks to global financial stability.