SYSTEMIC AND IDIOSYNCRATIC SOVEREIGN DEBT CRISES

The theoretical literature on sovereign defaults has focused on adverse shocks to debtors' economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center, such as the European Sovereign Debt Crisis in the aftermath of the US Subprime Crisis in 2008. Crises in the financial centers are rare disasters and, thus, their effects on the periphery can only be captured by examining long episodes. In this paper, we examine sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger losses for investors.