In this paper we analyze the effects of government spending shocks under different monetary regimes in the presence of sovereign default risk using a New Keynesian DSGE model for a small open economy. Default beliefs are introduced through a fiscal limit that determines the government's ability to service public liabilities. We find that an increase in government consumption generates positive output responses which are larger under flexible than fixed exchange rates, in contrast to the classical Mundell-Fleming paradigm. Intuitively, the increase in sovereign risk following the fiscal shock leads to a depreciation of the exchange rate that supports the trade balance under flexible exchange rates. Under fixed rates, however, the favourable relative price change induced by the increase in sovereign risk is eliminated by central bank intervention and only the crowding out effects of the fiscal expansion remain. When sovereign risk can worsen household's borrowing conditions, these results become more pronounced and we find that, under fixed exchange rates, the output response upon a government spending shock can even be negative for a sufficient degree of sovereign risk pass-through. Our results highlight the importance of sovereign risk in the transmission of fiscal policy changes and for the evaluation of macroeconomic stabilization policy across monetary regimes.