Sovereign Default and Fiscal Consolidation in Small Middle-Income States

Sovereign defaults pose tremendous pressure on fiscal policy. Although a third of all defaults since 1990 occurred in small middle-income countries, the literature focuses mainly on large developed economies. This paper compares the fiscal response for eight recent defaults in small middle-income countries. It analyses how two institutional configurations – membership in a monetary union and the use of IMF programmes –shape fiscal adjustment in response to sovereign defaults employing a narrative analysis of budgetary documents. It finds that fiscal adjustment is comparatively larger and politically more costly in countries that lack monetary policy autonomy. In contrast, fiscal adjustments are smaller in countries that are neither part of a monetary union nor under the assistance of an IMF programme. While membership in a monetary union can explain delays in consolidation and the choice between fiscal or other means, IMF programmes exert a strong influence on the particular fiscal instruments adopted.