Fear of Sovereign Default Sparks Recession and Financial Stress
The fear of a country defaulting on its debts can cause financial stress and lead to a recession, even if the default hasn't happened yet. This happens because when people expect a default, they demand higher interest rates on government debt and private loans, which can slow down the economy. Domestic banks play a role in this by holding government debt and adjusting their capital requirements based on the risk of default. So, even just the fear of default can have real economic consequences.