Why do governments repay external sovereign borrowing? Models where countries service their external debt for fear of being excluded from capital markets for a sustained period (or some other form of harsh punishment such as trade sanctions or invasion) seem very persuasive, yet are at odds with the fact that defaulters seem to be able to return to borrowing in international capital markets after a short while.
With sovereign debt in industrial countries at extremely high levels, understanding why sovereigns repay foreign creditors, and what their debt capacity might be, is an important concern for policymakers and investors around the world.
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