A/HRC/31/60 probability of default significantly. 32 In one research paper, it was emphasized that sudden, rapid rises in inequality, in particular, can considerably increase the sovereign default risk. The authors specify that such “inequality shocks” generate a far higher probability of default than collapses of domestic production of the same scale. 33 Several authors have also established that progressive income taxes, which decrease income inequality, can decrease the default risk.34 26. One explanation for these links focuses on the incentives of the government to reap the short-term gains of a default. By defaulting, the government may obtain new fiscal freedom — even if this freedom might be short-lived — permitting tax cuts or spending increases to the benefit of the poorer. These benefits are considered greater in more unequal societies with a larger number of low-income households.35 At the same time, owing to the higher probability that a government in highly unequal States may decide to default, lenders may accept only lower levels of aggregate debt before they sharply raise interest rates or even refuse to issue further credit.36 According to some authors, the levels of debt lenders deem acceptable differ for domestic and foreign debt, the letter being decidedly lower. 37 This indicates that external debt is per se an important factor that may cause sovereign default. 27. Yet, in the long run, default normally implies future costs owing to a (temporary) exclusion from financial markets. As the government cannot use any more debt to smooth taxes, it is forced to adjust its tax revenues to any short-term fluctuation. The resulting volatile taxation harms poorer households in particular. The more numerous they are, the larger the future costs of default therefore become. However, the incentives to default tend to dominate the second in very unequal societies; hence, economies with more progressive taxation have less incentive to default. 2. Inequality as an indirect cause of sovereign debt increase and financial crises 28. Inequality can also indirectly contribute to increased sovereign debt and consequently to sovereign debt crises. There are at least two avenues to such outcomes: (a) high levels of inequality contribute significantly to the generation and increase of private debt, with strong interrelationships between excessive private debt, sovereign debt and financial crises; and (b) inequality adversely affects social and political stability, thereby hampering growth and eventually affecting both government revenue and spending. 32 33 34 35 36 37 See A. Berg and J. Sachs, “The debt crisis structural explanations of country performance”, Journal of Development Economics, vol. 29, No. 3 (1988), pp. 271-306; J. Sachs, “The debt overhang of developing countries”, Debt, Stabilization and Development: Essays in Memory of Carlos Diaz Alejandro (Oxford, 1989) and the papers referred to in footnotes 33-37. See K. Jeon and Z. Kabukcuoglu, “Income inequality and sovereign default”, working paper (University of Pittsburgh, 2015). Ibid.; see also A. Ferriere, “Sovereign default, inequality and progressive taxation”, job market paper (New York University, 2014). See A. Ferriere, ibid.; and Y.K. Kim, “Inequality and sovereign default under democracy”, European Journal of Economic and Political Studies, vol. 6, No. 1 (2013), pp. 5-40. It is important to note that a default does not imply per se negative consequences for the population. It is mainly the fiscal retrenchment following the default — because the government cannot anymore borrow on financial markets — which impacts negatively the people’s human rights. See A. Dovis, M. Golosov and A. Shourideh, “Political economy of sovereign debt: cycles of debt crisis and inequality overhang”, mimeo (2015). See C.M. Reinhart, K.S. Rogoff and M.A. Savastano, “Debt intolerance”, Brookings Papers on Economic Activity, vol. 34, No. 1 (Brookings Institution, 2003), pp. 1-74. 9