Convergence in sovereign debt defaults: quantifying the roles of institutions

In this study, using an ex ante measure, we examine the convergence patterns in sovereign defaults among 101 developing countries for the period from 1990 to 2015. We employ the club convergence algorithm to determine convergence paths across countries and examine the role of institutions in shaping the observed convergence patterns. The merging of clubs reveals three distinct convergent sub-clubs. Countries in each of these sub-clubs tend to exhibit a similar pattern of long-run convergence in cases of sovereign debt default. Countries with better institutions are less likely to belong to a club with greater risks of sovereign defaults by 7% points. Unlike trade openness, levels of external debt, inflation and current account balance increase the probability of default in these economies.