The Domestic Side of Sovereign Defaults

Sovereign defaults are increasingly affecting liabilities governed by local law and held by local residents. This paper provides an overview of the existing literature on domestic defaults, describes a novel dataset that codifies defaults according to the jurisdiction of the instruments involved, and shows that domestic and foreign-law defaults have different macroeconomic implications. While a default affects economic growth regardless the legal jurisdiction, local-law defaults are more likely to trigger domestic financial instability and credit tightening, and foreign-law defaults are more likely to tighten access to external financing sources.