This paper explores the relationship between defaultable debt, interest rates, and the current account in emerging markets. The authors develop a quantitative model of debt and default in a small open economy, using it to match four empirical regularities: 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 authors find that the model's ability to match these empirical facts improves significantly when the productivity process is characterized by a volatile stochastic trend, rather than transitory fluctuations around a stable trend. This trend volatility captures the frequent switches in regimes that emerging markets experience, often associated with changes in government policy. The model with trend shocks generates a default rate of about once every 125 years, which is close to the observed rate in many emerging markets. However, to match the extreme default rates seen in Latin America, the authors introduce third-party bailouts, which dramatically increase the default rate to once every 27 years. The model also explains the countercyclical behavior of net exports and interest rates, as well as the positive correlation between interest rates and the current account. The paper concludes by discussing the implications of these findings for understanding the dynamics of emerging markets' financial systems.This paper explores the relationship between defaultable debt, interest rates, and the current account in emerging markets. The authors develop a quantitative model of debt and default in a small open economy, using it to match four empirical regularities: 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 authors find that the model's ability to match these empirical facts improves significantly when the productivity process is characterized by a volatile stochastic trend, rather than transitory fluctuations around a stable trend. This trend volatility captures the frequent switches in regimes that emerging markets experience, often associated with changes in government policy. The model with trend shocks generates a default rate of about once every 125 years, which is close to the observed rate in many emerging markets. However, to match the extreme default rates seen in Latin America, the authors introduce third-party bailouts, which dramatically increase the default rate to once every 27 years. The model also explains the countercyclical behavior of net exports and interest rates, as well as the positive correlation between interest rates and the current account. The paper concludes by discussing the implications of these findings for understanding the dynamics of emerging markets' financial systems.