Sanctions and incentives to repudiate external debt

Abstract

Often foreign countries levy sanctions in the attempt to foment discontent with a hostile government. But sanctions may provoke costly reactions by the leaders of the target country. This paper presents a model in which sanctions exhaust the target country economically and impair its government’s fiscal capacity. Then, an office-motivated leader may find it convenient to default on foreign debt in order to free resources that she can invest to regain internal political support. The default thus becomes a defensive tool to partially dampen the internal political turmoil sanctions generate.