In the months prior to the Argentine sovereign default of 2001 and, more recently, during the debt crises in Greece and Portugal, the governments of these countries faced tough political battles when they tried to implement the fiscal adjustments, required to avoid sovereign default. Greece, for example, has implemented several fiscal austerity packages since 2009. Nevertheless, these adjustments have been insufficient to bridge the budget gap and solve the debt crisis.
Furthermore, the austerity packages have been met by growing civil unrest and political opposition that might make further adjustments politically unfeasible. In the case of Portugal, in March 2011, the government proposed a package of austerity measures to restore fiscal balance and debt sustainability. However, opposition parties refused to back the proposal. This led the Portuguese Prime Minister to resign and prompted the need for a European Union International Monetary Fund rescue package in order to enable Portugal to meet the €4.9 billion of bond redemptions due in mid-June 2011.
The presence of political constraints that limit the margin of action of governments during the run-ups to sovereign debt crises seems the rule rather than the exception. However, the literature on sovereign default has abstracted from them, assuming that governments have unlimited access to the economy’s resources. This implies that the default or repayment decision is essentially determined by the government’s will.
The real world sovereign default universe is richer than the traditional the oretical depiction of it. In many circumstances, sovereign defaults are not the result of the governments’ unwillingness to repay but of the tough political opposition they face when trying to raise the funds necessary to repay the debt.
