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

Democratic hypothesis. The opinion of democratic hypothesis is: A free parliament, an independent judiciary, a powerful legal system and the system of central bank which ensure a stable currency significantly enhance the control of wealth holders over the government, so as to limit administrative power and reduce the possibility of default. One problem of this hypothesis is that its logic is tenable only when creditors are domestic voters. For some developing countries, they rely more on foreign debt, their domestic democratic institutions do not represent the interests of foreign creditors, and foreign creditors cannot always claim legal or political complaints to the courts or parliaments of the debtor governments. More importantly, the evidence does not support the democratic hypothesis. Information about institutional reform barely has a rapid and significant impact on bond yields, this indicates that investors usually do not know or are not interested in the institutional characteristics of their potential debtors.

Spillover cost hypothesis. The opinion of this hypothesis: Default will cause spillover costs to the domestic economy, such as the domestic financial system may possible collapse, the risk of stock market will rise, private sectors get less access to credit, foreign direct investment will escape, trade credit is not possible to obtain and so on. However, the spillover cost of default is generally short-term and usually disappears after one or two years. Default is unfavorable to the domestic financial sectors and the export sectors which rely on trade credit, but due to currency devaluation, it is beneficial for the domestic industrial sector to compete with imported goods, because imported goods are more expensive. Therefore, on the whole, the spillover cost may not be so large, and the spillover cost only cannot explain the debt repayment mystery also.