The article explains how the relationship between a country's financial risk and its economic activity can be better understood by considering how a country's default on its debt can lead to changes in output. The researchers found that when a country defaults on its debt, it can cause an internal collapse in output, which affects the country's risk level and debt ratios. This collapse in output is influenced by factors like the cost of financing working capital and the efficiency of imported inputs. By taking these factors into account, the researchers were able to create a model that accurately predicts the relationship between debt ratios, country risk, and economic output in emerging economies.