Despite a recovery in the global economy from the pandemic, many developing countries are approaching a default on their debts. The lessons from history is that they should not delay a decision to default for too long.
The reasons why countries postpone a decision are understandable. Finance ministers fear for their jobs, bankers and lawyers talk about lost credibility, and surely markets will not forget the next time a country wants to borrow money. At least that seems to be conventional wisdom.
The cost of a sovereign default can be significant, but depends crucially on how and why it occurs. In a “hard” (or unilateral) debt default, where the country is unwilling or unable to pay, economic growth can, and often does, deteriorate. The risk of knock-on effects from the currency or banking system in these situations is high.