Strategic Sovereign Defaults under International Sanctions

Sanctions induce political instability. We present a model where sanctionedregimes may decide to repudiate their public debts in order to keep internal sup-port. To be eective, this strategy requires the share of foreign debt to be largerthan the minimum quota of population which is needed for regime support. Combining the data we highlight that more than a third of all sovereign debt crisesin the 1970-2001 period are connected to an international sanction episode. Torule out endogeneities, we propose an innovative instrumental variable based onforeign policy cycles. Results conrm that sovereign defaults reduce sanctions'destabilizing impact. When the scope for internal nancial transfers is particu-larly narrow, debt repudiation releases resources for public spending, invalidatingchances of overthrow. Lastly, we report evidence of sizeable anticipation eectswhich contradict the enforcement theory: high chances of receiving sanctions in the future imply a current 20% rise in probability of strategic default.[...]