This paper sheds new light on the “trade costs” of sovereign default. It argues that the decline in trade in the wake of sovereign debt crises documented in earlier studies is the result of a reduction in exporters’ access to foreign credit. Using an annual panel of 28 industries in 100 countries between 1980 and 2007, it shows that default leads to a stronger contraction in the exports of sectors which are more dependent on external financing, consistent with this hypothesis. This finding is robust across different econometric specifications, and of economically significant magnitude. It suggests that any impact of sovereign default on trade, rather than a cost of default in its own right, may be a symptom of reduced access to international capital markets
