Why is sovereign debt rarely defaulted unilaterally in recent years? (V)

Royld Jin

Nov 22, 2021

The reason why the three mechanisms illustrated before play an important role in promoting the continuous debt repayment of debtor countries is that the international financial structure has undergone profound changes since the disintegration of the Bretton Woods monetary system in the 1970s. These changes have imposed strict limits on debtors. After considering the advantages and disadvantages, even if debt repayment will cause severe adverse consequences, the debtor is still unwilling to choose unilateral default.

The first important modification is that the international credit market continues to be concentrated, resulting in more and more debtors' liabilities being held by private banks and financial institutions with systemic importance and strong political power in a small range of developed capitalist countries. Large banks and institutions usually have a common interest in promoting debtors' repayment, which means that they are more likely to form a alliance against debtors in crisis.The interests of these creditors are twined with each other at the level of a highly integrated global financial system, which makes it easier for them to coordinate the collective renewal of mature debt and provide further short-term credit lines to maintain debt solvency and ensure maximum debt repayment. Through promoting this unstable balance between sustained financing and the credible threat of withdrawal of credit in large scale, the centralization of international credit markets has greatly enhanced the effectiveness of the first implementation mechanism.

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