This paper presents a quantitative model of debt and default in a small open economy, which is used to match four empirical regularities of emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. The model is based on the classic framework of Eaton and Gersovitz (1981), where risk sharing is limited to one-period bonds and repayment is enforced by the threat of financial autarky. The model is a standard small open economy model where the only source of shocks are domestic productivity shocks. The model's ability to match the facts in the data improves substantially when the productivity process is characterized by a volatile stochastic trend rather than transitory fluctuations around a stable trend. The paper shows that the presence of trend shocks substantially improves the ability of the model to generate empirically relevant levels of default. The model also generates the coincidence of countercyclical net exports, countercyclical interest rates, and a positive correlation between interest rates and the current account observed in the data. The model with transitory shocks fails to match these facts. The model with trend shocks matches the rate of default observed in many emerging markets. However, it falls short of the extreme rates seen in Latin America. The paper introduces third-party bailouts to bring the default rate closer to that observed empirically for Latin America. The model performs well on most dimensions save one. The subsidy implied by bailouts breaks the tight linkage between default probability and the interest rate. Interest rate volatility is therefore an order of magnitude below that observed empirically. The paper also shows that the model with trend shocks generates a positive comovement between interest rates and the current account without recourse to any external shocks. The paper concludes that the presence of trend shocks is crucial for explaining default in emerging markets.This paper presents a quantitative model of debt and default in a small open economy, which is used to match four empirical regularities of emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. The model is based on the classic framework of Eaton and Gersovitz (1981), where risk sharing is limited to one-period bonds and repayment is enforced by the threat of financial autarky. The model is a standard small open economy model where the only source of shocks are domestic productivity shocks. The model's ability to match the facts in the data improves substantially when the productivity process is characterized by a volatile stochastic trend rather than transitory fluctuations around a stable trend. The paper shows that the presence of trend shocks substantially improves the ability of the model to generate empirically relevant levels of default. The model also generates the coincidence of countercyclical net exports, countercyclical interest rates, and a positive correlation between interest rates and the current account observed in the data. The model with transitory shocks fails to match these facts. The model with trend shocks matches the rate of default observed in many emerging markets. However, it falls short of the extreme rates seen in Latin America. The paper introduces third-party bailouts to bring the default rate closer to that observed empirically for Latin America. The model performs well on most dimensions save one. The subsidy implied by bailouts breaks the tight linkage between default probability and the interest rate. Interest rate volatility is therefore an order of magnitude below that observed empirically. The paper also shows that the model with trend shocks generates a positive comovement between interest rates and the current account without recourse to any external shocks. The paper concludes that the presence of trend shocks is crucial for explaining default in emerging markets.