Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for non tradable sectors. This paper documents these patterns using Spanish data and builds a two sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock raises default risk and limits capital inflows which restrict the ability of the economy to exploit investment opportunities. The economy responds by reducing investment, reallocating capital towards the traded sector, and reducing tradable consumption to support the repayment of debt. Real exchange rates depreciate, as a reflection of the scarcity of traded goods. We find that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.