Determinant of Sovereign Default— Does Political Factors Matter?

In this paper, I study the impact of political risk on sovereign default. An extended model of Alesina and Tabellini (1990) shows that political instability increases the likelihood of default. To test the theoretical implication, a panel logit model is adopted to estimate the effect of political factors, along with other macroeconomic variables on the probability of default. Data from 68 countries in the period of 1970 to 2010 is used to conduct the study, including both developed and developing countries. Some key findings suggest that a country is more likely to default when i) it has a relatively younger political regime in place; ii) it faces a higher chance of political turnover; and iii) it has a less democratic political system. Economic and liquidity factors are also vital as a country with stronger growth and less external debt is less likely to experience sovereign debt crisis. Robustness tests using alternative measures of political risk and EMBI sovereign bond spreads also support the baseline findings.