We build a stochastic model of excusable sovereign default which incorporates

a simple debt recovery rule. It depends on a single parameter that allows for

partial debt recovery. We show that the maximum debt-to-GDP ratio that a

country can sustain without defaulting is increasing, nonlinear, and sensitive to

the debt-recovery parameter. We study the dynamics of public debt when the

default premium is taken into account and offer new definitions of public debt

unsustainability. A higher debt recovery parameter increases the fiscal space but

worsens the financial position of a borrowing country after a default episode. We

show that the estimated debt-recovery parameter is lower for emerging countries

than for developed countries.

JEL classification: E44, F34, H6, H62, H63,

Key words: Public Debt Sustainability, Sovereign Default, Partial Default