Sovereign Default
A sovereign default crisis is the endgame of fiscal mismanagement. When a country's debt burden overwhelms demand for its bonds, auctions begin to fail. After three consecutive failed auctions, the country enters a crisis with a fixed window for the executive and legislature to choose a resolution. Each path carries a GDP penalty and a long "scar" that suppresses the bond market for years afterward.
There is no feature flag — sovereign default is always active.
Trigger: Failed Auctions
Sovereign bond auctions are evaluated once per fiscal year (turn 40). Demand is measured as a demand ratio:
| Demand ratio | Status |
|---|---|
| ≥ 1.0 | Subscribed (healthy) |
| 0.7 – 1.0 | Undersubscribed (warning) |
| < 0.7 | Failed |
A default crisis is triggered by 3 consecutive failed auctions — three straight years of demand ratio below 0.7.
Demand Penalty Curve
The demand ratio is driven down by three penalties that stack:
Debt-to-GDP penalty
BASE_DEMAND = 1.2
FLOOR = 0.6
RATE = 0.3 // normal regime
CLIFF_RATE = 0.4 // kicks in once debt/GDP > 2.0
demand = BASE_DEMAND − RATE × min(debtGDP, 2.0)
if debtGDP > 2.0:
demand −= CLIFF_RATE × (debtGDP − 2.0)
demand = max(demand, FLOOR)
``
The cliff at 2.0× debt-to-GDP means crossing that threshold accelerates the collapse — the rate steepens from 0.3 to 0.4 per unit of excess leverage.
### Inflation penalty
inflationPenalty = max(inflation × 2.0, floor 0.05) ``
A minimum 0.05 penalty applies even at low inflation; above that it scales linearly with the inflation rate.
FX depreciation penalty
fxPenalty = depreciation × 1.5
``
A weakening currency compounds the demand problem — foreign buyers face a depreciating asset.
The final demand ratio is the base minus all three penalties, floored at 0.6.
## Warning Window
The system gives a **3-turn warning** before the crisis formally fires. During this window the country dashboard and `/world/crises` show a countdown, giving the executive a chance to act pre-emptively (cut spending, raise rates, negotiate).
## Crisis Windows
Once the crisis triggers, two clocks start:
| Decision | Window |
| --- | --- |
| Executive proposes a resolution | 12 turns |
| Each legislative chamber votes | 24 turns per chamber |
If either window expires without action, consequences escalate (forced resolution, governance collapse, or automatic repudiation depending on the country's constitution).
## Resolution Paths
The executive selects one of three resolutions, each with a different GDP penalty:
| Path | GDP penalty | Description |
| --- | --- | --- |
| **Repudiate** | −12% GDP | Refuse to pay; bondholders take the full hit |
| **Restructure** | −6% GDP | Haircut + maturity extension for bondholders |
| **IMF Bailout** | −2% GDP | Accept an IMF facility (see [IMF & Bailouts](/wiki/imf)) |
Repudiate is the most destructive to the economy and to investor confidence but leaves the country debt-free. Restructure splits the pain between the state and bondholders. The IMF bailout is the smallest immediate GDP hit but comes with the IMF's own ongoing conditions (income capture, share-price discount).
## Default Scar
Regardless of path, a default leaves a **scar** lasting 100 turns:
scarPenalty = −1% per turn (applied for 100 turns) ``
This is a persistent drag on economic performance — a country that defaulted is visibly crippled for years, which is why avoiding the third failed auction is so critical.
Cascade Depth
Bond-holder insolvency cascades up to 3 levels deep. If a major bondholder (a bank, fund, or corporation) is wiped out by a sovereign haircut, its own creditors are stressed; if they fail, the next ring is tested, and so on for three levels. This is how a single sovereign default can trigger a systemic financial crisis.
Recovery Floor
After resolution, the country's bond market stays closed for 48 turns before new sovereign auctions can resume:
recoveryFloor = 48 turns (bond market closed)
``
During this floor the country cannot roll debt, forcing it to run primary surpluses or rely on the IMF facility.
## Summary of Constants
| Constant | Value |
| --- | --- |
| BASE_DEMAND | 1.2 |
| Demand floor | 0.6 |
| Normal rate (debt/GDP) | 0.3 |
| Cliff rate (debt/GDP > 2.0) | 0.4 |
| Debt-to-GDP cliff threshold | 2.0 |
| Inflation floor | 0.05 |
| Inflation rate | 2.0 |
| FX depreciation rate | 1.5 |
| Failed-auction threshold | demand < 0.7 |
| Undersubscribed threshold | demand < 1.0 |
| Consecutive failures to trigger | 3 |
| Warning window | 3 turns |
| Executive decision window | 12 turns |
| Legislative vote window | 24 turns per chamber |
| Repudiate GDP penalty | −12% |
| Restructure GDP penalty | −6% |
| IMF bailout GDP penalty | −2% |
| Default scar duration | 100 turns |
| Scar per-turn penalty | −1% |
| Cascade depth | 3 levels |
| Recovery floor | 48 turns |
See also: [Sovereign Bonds](/wiki/sovereign-bonds), [IMF & Bailouts](/wiki/imf), [Central Banks](/wiki/central-banks), [National Budget](/wiki/national-budget)