We study sovereign debt and default policies when credit and liquidity risk are jointly determined. To account for both types of risks we focus on an economy with incomplete markets, limited commitment, and search frictions in the secondary market for sovereign bonds. We quantify the effect of liquidity on sovereign spreads, debt capacity, and welfare by performing quantitative exercises when our model is calibrated to match key features of the Argentinean default in 2001. We find that the liquidity premium is a substantial component of spreads and increases during bad times, and reductions in secondary market frictions improve welfare.