Sovereign default

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A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay (repudiation) or only partially pay its debts (due receivables), or the de facto cessation of due payments. Most authorities will limit the use of "default" to mean failure to abide by the terms of bonds or other debt instruments. Countries have at times escaped the real burden of some of their debt through inflation. This is not "default" in the usual sense because the debt is honored, albeit with currency of lesser real value. Sometimes countries devalue their currency by ending or altering the convertibility of their currency into precious metals or foreign currency at fixed rates. This is also not "default" in the usual sense of the word, since all monies owed are repaid as required by the terms of the contract.

If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in compensation for the risk of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honor its debt is sometimes called a sovereign debt crisis. Governments may be especially vulnerable to a sovereign debt crisis when they rely on financing through short-term bonds, since this creates a situation of maturity mismatch between their short-term bond financing and the long-term asset value of their tax base. They may also be vulnerable to a sovereign debt crisis due to currency mismatch if they are unable to issue bonds in their own currency, as a decrease in the value of their own currency may then make it prohibitively expensive to pay back their foreign-denominated bonds (see original sin).[1]

Since a sovereign government, by definition, controls its own affairs, it cannot be obliged to pay back its debt.[2] Nonetheless, governments may face severe pressure from lending countries. In the most extreme cases, a creditor nation may declare war on a debtor nation for failing to pay back debt, in order to enforce creditor's rights. For example, Britain routinely invaded countries that failed to repay foreign debts, invading Egypt in 1882.[citation needed] Other examples include the United States' "gunboat diplomacy" in Venezuela in the mid-1890s and the United States occupation of Haiti beginning in 1915.[3] A government which defaults may also be excluded from further credit and some of its overseas assets may be seized;[3] and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore governments rarely default on the entire value of their debt. Instead, they often enter into negotiations with their bondholders to agree on a delay or partial reduction of their debt payments, which is often called a debt restructuring or 'haircut'.

Some economists have argued that, in the case of acute insolvency crises, it can be advisable for regulators and supranational lenders to preemptively engineer the orderly restructuring of a nation’s public debt- also called “orderly default” or “controlled default”.[4][5] In the case of Greece, these experts generally believe that a delay in organising an orderly default would hurt the rest of Europe even more.[6]

The International Monetary Fund often assists in sovereign debt restructurings. To ensure that funds will be available to pay the remaining part of the sovereign debt, it often makes its loans conditional on austerity measures within the country, such as tax increases or reductions in public sector jobs and services. A recent example is the Greek bailout agreement of May 2010.


According to financial historian Edward Chancellor, past instances of sovereign default have tended to occur under some or all of the following circumstances:[7]

  • A reversal of global capital flows
  • Unwise lending
  • Fraudulent lending
  • Excessive foreign debts
  • A poor credit history
  • Unproductive lending
  • Rollover risk
  • Weak revenues
  • Rising interest rates
  • Terminal debt

A significant factor in sovereign default is the presence of significant debts owed to foreign investors who are unable to counter such actions in another nation's political processes or otherwise (e.g., via support from their own government(s) or supranational courts); the enforcement of creditor's rights against sovereign states is frequently difficult. Such willful defaults (the equivalent of strategic bankruptcy by a company or strategic default by a mortgager, except without the possibility of the exercise of normal creditor's rights such as asset seizure and sale) can be considered a variety of sovereign theft; this is similar to expropriation (including inadequate repayment for the exercise of eminent domain).[8][9]

Insolvency/over-indebtedness of the state[edit]

If a state, for economic reasons, defaults on its treasury obligations, or is no longer able or willing to handle its debt, liabilities, or to pay the interest on this debt, it faces sovereign default. To declare insolvency, it is sufficient if the state is only able (or willing[8]) to pay part of its due interest or to clear off only part of the debt.

Reasons for this include:[citation needed]

  • massive increases in public debt
  • declines in employment and therefore tax receipts
  • government regulation or perceived threats of regulation of financial markets
  • popular unrest at austerity measures to repay debt fully

Sovereign default caused by insolvency historically has always appeared at the end of long years or decades of budget emergency (overspending[10]), in which the state has spent more money than it received. This budget balance/margin was covered through new indebtedness with national and foreign citizens, banks and states.


The literature proposes an important distinction between illiquidity and insolvency. A country which temporarily lacks the ability to meet pending interest payments or principle due to no liquid assets is in default because of illiqudity. This default can be solved as soon as the illiquid assets are changed to liquid assets. In contrast to insolvency, illiqudity is a temporary state caused by external market failure. This accounts for the wilingness of creditors to provide alternative arrangements for debt repayment.

Change of government[edit]

While normally the change of government does not change the responsibility of the state to handle treasury obligations created by earlier governments, nevertheless it can be observed that in revolutionary situations and after a regime change the new government may question the legitimacy of the earlier one, and thus default on those treasury obligations considered odious debt.

Important examples are:

Decline of the state[edit]

With the decline of the state,[clarification needed] its obligations are turned over to one or several successor states.

Lost wars significantly accelerate sovereign default. Nevertheless, especially after World War II the government debt has increased significantly in many countries even during long lasting times of peace. While in the beginning debt was quite small, due to compound interest and continued overspending[10] it has increased substantially.


Creditors of the state as well the economy and the citizens of the state are affected by the sovereign default.

Consequences for creditors[edit]

While it is commonly thought sovereign defaults have large costs for the creditor countries, evidence of these costs is hard to find.

In this case very often there are international negotiations which end in a partial debt cancellation (London Agreement on German External Debts 1953) or debt restructuring (e.g. Brady Bonds in the 1980s). This kind of agreement assures the partial repayment when a renunciation / surrender of a big part of the debt is accepted by the creditor. In the case of the Argentine economic crisis (1999–2002) the creditors had to accept the renunciation (loss) of up to 75% of the outstanding debts.

For the purpose of debts regulation debts can be distinguished by nationality of creditor (national or international), or by the currency of the debts (own currency or foreign currency) as well as whether the foreign creditors are private or state owned. States are frequently more willing to cancel debts owed to foreign private creditors, unless those creditors have means of retaliation against the state.[8]

Consequences for state[edit]

When a state defaults on a debt, the state disposes of (or ignores, depending on the viewpoint) its financial obligations/debts towards certain creditors.[citation needed] The immediate effect for the state is a reduction in its total debt and a reduction in payments on the interest of that debt. On the other hand, a default can damage the reputation of the state among creditors, which can restrict the ability of the state to obtain credit from the capital market.[8] In some cases foreign lenders may attempt to undermine the monetary sovereignty of the debtor state or even declare war (see above).

Consequences for the citizen[edit]

If the individual citizen or corporate citizen is a creditor of the state (e.g. government bonds), then a default by the state can mean a devaluation of their monetary wealth.

In addition, the following scenarios can occur in a debtor state from a sovereign default:

  • a banking crisis, as banks have to make write downs on credits given to the state.
  • an economic crisis, as the interior demand will fall and investors withdraw their money
  • a currency crisis as foreign investors avoid this national economy

Citizens of a debtor state might feel the impact indirectly through high unemployment and the decrease of state services and benefits. However, a monetarily sovereign state can take steps to minimize negative consequences, rebalance the economy and foster social/economic progress (e.g. Plano Real).[12]


With the reputation of the Big Three - Standard & Poor's, Moody's and Fitch Group - coming under fire since the 2008 financial crisis, many have questioned their ratings methods. Marc Joffe, a former Senior Director at Moody's and now Principal Consultant at Public Sector Credit Solutions (PSCS), has recently argued that economists and other academic social scientists, via logit and probit econometric models, are better equipped than ratings agencies to assess the default risk of sovereigns and municipalities.[13] To support better ratings methods, PSCS (in partnership with Wikirating) maintains a comprehensive public database of sovereign defaults, revenues, expenditures, debt levels, and debt service costs. PSCS has also developed the Public Sector Credit Framework, an open source budget simulation model that helps analysts assess default probabilities.

Examples of sovereign default[edit]

A failure of a nation to meet bond repayments has been seen on many occasions. Philip II of Spain defaulted on debt four times - in 1557, 1560, 1575 and 1596 - becoming the first nation in history to declare sovereign default due to rising military costs and the declining value of gold, as it had become increasingly dependent on the revenues flowing in from its mercantile empire in the Americas.[14][15] This sovereign default threw the German banking houses into chaos and ended the reign of the Fuggers as Spanish financiers. Genoese bankers provided the unwieldy Habsburg system with fluid credit and a dependably regular income. In return the less dependable shipments of American silver were rapidly transferred from Seville to Genoa, to provide capital for further ventures.

In the 1820s, several Latin American countries which had recently entered the bond market in London defaulted. These same countries frequently defaulted during the nineteenth century, but the situation was typically rapidly resolved with a renegotiation of loans, including the writing off of some debts.[16]

A failure to meet payments became common again in the late 1920s and 1930s; as protectionism rose and international trade fell, countries possessing debts denominated in other currencies found it increasingly difficult to meet terms agreed under more favourable economic conditions. For example, in 1932, Chile's scheduled repayments exceeded the nation's total exports (or, at least, its exports under current pricing; whether reductions in prices - forced sales - would have enabled fulfilling creditor's rights is unknown).[16]

List of sovereign debt defaults or debt restructuring[edit]

The following list includes actual sovereign defaults and debt restructuring of independent countries from 1800 till 2012:[17]

  • Algeria (1991)
  • Angola (1976,[18] 1985, 1992-2002[18])
  • Cameroon (2004)[18]
  • Central African Republic (1981, 1983)
  • Congo (Kinshasa) (1979)[18]
  • Côte d'Ivoire (1983, 2000, 2011)
  • Gabon (1999–2005)[18]
  • Ghana (1979, 1982)[18]
  • Liberia (1989–2006)[18]
  • Madagascar (2002)[18]
  • Mozambique (1980)[18]
  • Rwanda (1995)[18]
  • Sierra Leone (1997–1998)[18]
  • Sudan (1991)[18]
  • Tunisia (1867)
  • Egypt (1876, 1984)
  • Kenya (1994, 2000)
  • Morocco (1983, 1994, 2000)
  • Nigeria (1982, 1986, 1992, 2001, 2004)
  • South Africa (1985, 1989, 1993)
  • Zambia (1983)
  • Zimbabwe (1965, 2000, 2006[18] (see Hyperinflation in Zimbabwe)
  • Antigua and Barbuda (1998–2005)[18]
  • Argentina (1827, 1890, 1951, 1956, 1982, 1989, 2002-2005[18] (see Argentine debt restructuring), 2014[19][19][20])
  • Bolivia (1875, 1927,[18] 1931, 1980, 1986, 1989)
  • Brazil (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986–1987,[18] 1990[18])
  • Canada (Alberta) (1935)[18]
  • Chile (1826, 1880, 1931, 1961, 1963, 1966, 1972, 1974, 1983)
  • Colombia (1826, 1850, 1873, 1880, 1900, 1932, 1935)
  • Costa Rica (1828, 1874, 1895, 1901, 1932, 1962, 1981, 1983, 1984)
  • Dominica (2003–2005)[18]
  • Dominican Republic (1872, 1892, 1897, 1899, 1931, 1975-2001[18] (see Latin American debt crisis), 2005)
  • Ecuador (1826, 1868, 1894, 1906, 1909, 1914, 1929, 1982, 1984, 2000, 2008)
  • El Salvador (1828, 1876, 1894, 1899, 1921, 1932, 1938, 1981-1996[18])
  • Grenada (2004–2005)[18]
  • Guatemala (1933, 1986, 1989)
  • Guyana (1982)
  • Honduras (1828, 1873, 1981)
  • Jamaica (1978)
  • Mexico (1827, 1833, 1844, 1850,[18] 1866, 1898, 1914, 1928-1930s, 1982)
  • Nicaragua (1828, 1894, 1911, 1915, 1932, 1979)
  • Panama (1932, 1983, 1983, 1987, 1988-1989[18])
  • Paraguay (1874, 1892, 1920, 1932, 1986, 2003)
  • Peru (1826, 1850,[18] 1876, 1931, 1969, 1976, 1978, 1980, 1984)
  • Surinam (2001–2002)[18]
  • Trinidad and Tobago (1989)
  • United States (1779 (devaluation of Continental Dollar), 1790, 1798 (see The Quasi-war), 1862,[21] 1933 (see Executive Order 6102),[18] 1971 (Nixon Shock)
    • 9 states (1841–1842)[18]
    • 10 states (1873-83 or 1884)[18]
  • Uruguay (1876, 1891, 1915, 1933, 1937,[18] 1983, 1987, 1990)
  • Venezuela (1826, 1848, 1860, 1865, 1892, 1898, 1982, 1990, 1995–1997,[18] 1998,[18] 2004)
  • China (1921, 1932,[18] 1939)
  • Japan (1942, 1946-1952[18])
  • India (1958, 1969,[citation needed] 1972)
  • Indonesia (1966)
  • Iran (1992)
  • Iraq (1990)
  • Jordan (1989)
  • Kuwait (1990–1991)[18]
  • Myanmar (1984,[18] 1987,[18] 2002)
  • Mongolia (1997–2000)[18]
  • The Philippines (1983)
  • Solomon Islands (1995–2004)[18]
  • Sri Lanka (1980, 1982, 1996[18])
  • Vietnam (1985)[18]
  • Albania (1990)
  • Austria-Hungary (1796, 1802, 1805, 1811, 1816, 1868)
  • Austria (1938, 1940, 1945[18])
  • Bulgaria (1932,[citation needed] 1990)
  • Croatia (1993–1996)[18]
  • Denmark (1813)[18] (see Danish state bankruptcy of 1813)
  • France (1812)
  • Germany (1932, 1939, 1948[18])
    • Hesse (1814)
    • Prussia (1807, 1813)
    • Schleswig-Holstein (1850)
    • Westphalia (1812)
  • Greece (external debt: 1826-1842, 1843-1859, 1860-1878, 1894-1897, 1932-1964, 2010-present;[22][23][24] domestic debt: 1932-1951[22])
  • Hungary (1932, 1941)
  • The Netherlands (1814)
  • Poland (1936, 1940, 1981)
  • Portugal (1828, 1837, 1841, 1845, 1852, 1890)
  • Romania (1933)
  • Russia (1839, 1885, 1918, 1947,[18] 1957,[18] 1991, 1998)
  • Spain (1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939[18])
  • Sweden (1812)
  • Turkey (1876, 1915, 1931, 1940, 1978, 1982)
  • Ukraine (1998–2000)[18]
  • United Kingdom (1822, 1834, 1888–89, 1932)[18]
  • Yugoslavia (1983) (Yugoslavia didn't default directly, it's debt was split between the nations once part of Yugoslavia)

See also[edit]


  • Jean Tirole (2002), Financial Crises, Liquidity, and the International Monetary System.
  • Guillermo Calvo (2005), Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?
  • Barry Eichengreen (2002), Financial Crises: And What to Do about Them.
  • Barry Eichengreen and Ricardo Hausmann, eds., (2005), Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies.
  • Barry Eichengreen and Peter Lindert, eds., (1992), The International Debt Crisis in Historical Perspective.
  • M. Nicolas J. Firzli (2010), Greece and the Roots the EU Debt Crisis.
  • Charles Calomiris (1998), 'Blueprints for a new global financial architecture'.
  • Carmen M. Reinhart and Kenneth S. Rogoff (2009), This time is different: Eight Centuries of Financial Folly.


  1. ^ Eichengreen, B.; Hausmann, R. (2005). Other People's Money: Debt Denomination and Financial Instability in Emerging Economies. Chicago: Univ. of Chicago Press. ISBN 0-226-19455-8. 
  2. ^ Borensztein, E.; Panizza, U. (Nov 10, 2010). "The Costs of Sovereign Default: Theory and Reality". VOXLACEA. 
  3. ^ a b Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This time is different: Eight Centuries of Financial Folly (p. 54ff). Princeton University Press. ISBN 0-691-14216-5. 
  4. ^ Firzli, M. Nicolas J. (March 2010). "Greece and the Roots the EU Debt Crisis". The Vienna Review. 
  5. ^ Roubini, Nouriel (June 28, 2010). "Greece’s best option is an orderly default". Financial Times. 
  6. ^ Louise Armitstead, "EU accused of 'head in sand' attitude to Greek debt crisis" The Telegraph, 23 June 2011
  7. ^ Reflections on the sovereign debt crisis, Edward Chancellor, GMO White Paper, Juli 2010.
  8. ^ a b c d Wright, Mark; Tomz, Mike (2010). "Sovereign Theft: Theory and Evidence about Sovereign Default and Expropriation". In Hogan, William; Sturzenegger, Federico. The Natural Resources Trap: Private Investment without Public Commitment. Cambridge, MA, USA: MIT Press. pp. 69–110. Retrieved 6 November 2011. 
  9. ^ Hagerty, James R. (2009-12-17), "Is Walking Away From Your Mortgage Immoral?", The Wall Street Journal 
  10. ^ a b Baqir, Reza (30 September 1999), Districts, spillovers, and government overspending, World Bank 
  11. ^ Landon-Lane J., Oosterlinck K., (2006), "Hope springs eternal: French bondholders and the Soviet Repudiation (1915-1919)", Review of Finance, 10, 4, pp. 507-535.
  12. ^ Lim, Richard (2011-06-20). "Brazil's Battle Against Inflation". Retrieved 2013-10-14. 
  13. ^ "Joffe, Marc. "Rating Government Bonds: Can We Raise Our Grade?" Econ Journal Watch 9(3): 350-365, September 2012". Retrieved 2013-10-14. 
  14. ^ Gold and Silver: Spain and the New World University of California
  15. ^ "Washington Blog-September 11, 2010-"United States Joint Forces Command Warns That Huge U.S. Debt Might Lead to Military Impotence, Default or Revolution" (Example of default by the Spanish Empire is cited):". 2010-09-11. Retrieved 2013-10-14. 
  16. ^ a b Erika Jorgensen and Jeffrey Sachs, "Default and Renegotiation of Latin American Foreign Bonds in the Interwar Period" In: Barry J. Eichengreen and Peter H. Lindert, The International Debt Crisis in Historical Perspective
  17. ^ Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This time is different: Eight Centuries of Financial Folly (p. 23, 87, 91, 95, 96). Princeton University Press. ISBN 0-691-14216-5. 
  18. ^ a b c d e f g h i j k l m n o p q r s t u v w x y z aa ab ac ad ae af ag ah ai aj ak al am an ao ap aq ar as at au av aw ax ay The Forgotten History of Domestic Debt, Carmen M. Reinhart and Kenneth S. Rogoff, 17. April 2008, NBER, p.41ff
  19. ^ a b
  20. ^
  21. ^ A Short History of US Credit Defaults, Ludwig von Mises Institute, 15 July 2011
  22. ^ a b Reinhart, Carmen (2010). "Greece: Crises dates, 1800-2010.". (Excel file; economic database). 
  23. ^ "A Greek Odyssey: 1821–2201". Retrieved 19 May 2011. 
  24. ^ "Greece’s default: The wait is over". The Economist. 2012-03-17. Retrieved 2013-10-14. 

External links[edit]