[1] Many countries that have defaulted on their history have done so repeatedly, with remarkable similarities and synchronization, coinciding in most cases with economic downturns.
Over-borrowing behavior was an important feature of default episodes in the 1980s and 1990s, and was the result of shortsighted governments that, instead of seeking long-term goals, were just willing to take risks in order to temporally raise consumption, pushing them to contract excessive debt.
In contrast, non-defaulter countries (such as India, Korea, Malaysia, Singapore, and Thailand) never experienced episodes of high inflation, which is only comparable to industrial economies with no external default history.
The hypothesis main drawback is that the link between past and current outcomes may be induced by variables omitted in the initial analysis.
[5] From a broad point of view, serial defaults and a history of high inflation are just indicators of a larger set of institutional weaknesses characterizing debt crises in emerging economies, such as fragile fiscal structures, unreliable policies and vulnerable financial systems.
Persistent episodes of default have important economic repercussions on trade, investment flows and growth, but they also generate institutional erosion, immersing the economy in two well-defined vicious circles.
In addition, unreliable policies may generate low levels of credibility from investors, leading to substantial risk premium.
[6] The high volatility in domestic output and terms of trade appears as key devices determining the indebtedness capacity of emerging economies.
More volatility would induce a higher default risk, restricting the borrowing capacity of countries even at low levels of indebtedness.