Why are governments able to repeatedly issue positive sovereign debt, default on it, and then borrow again? This paper develops a political signaling channel that links defaults and settlements to private investment: a government repays new debt or settles old default to signal its ability to support private markets, in order to attract private investment. I embed a signaling game into a stochastic dynamic model of a small open economy. The model generates equilibrium cycles of defaults and settlements, endogenous creditor losses (or haircuts) and an endogenous co-movement between default cycles and private investment cycles in the borrowing countries, as documented in data.