Sovereign default

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A sovereign default is a failure by the government of a sovereign state to pay back its debt in full.

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. For example, Britain routinely bullied countries that failed to repay foreign debts, invading Egypt in 1882 and Istanbul in the wake of Turkey's 1876 default.[3] 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 (e.g. Chile's copper mines were seized by U.S. companies in 1977);[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 multilateral 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 wind up hurting 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.

Causes

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
  • Excessive foreign debts
  • A poor credit history
  • Unproductive lending
  • Rollover risk
  • Weak revenues
  • Rising interest rates

List of sovereign debt defaults

The following list includes actual sovereign defaults and debt restructuring of independent countries from 1300 till 2008:[8]

Africa
  • Algeria (1991)
  • Angola (1976[9], 1985, 1992-2002[9])
  • Cameroon (2004)[9]
  • Central African Republic (1981, 1983)
  • Congo (Kinshasa) (1979)[9]
  • Cote d'Ivoire (1983, 2000)
  • Gabon (1999-2005)[9]
  • Ghana (1979, 1982)[9]
  • Liberia (1989-2006)[9]
  • Madagascar (2002)[9]
  • Mozambique (1980)[9]
  • Rwanda (1995)[9]
  • Sierra Leone (1997-1998)[9]
  • Sudan (1991)[9]
  • 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[9])
Americas
  • Antigua and Barbuda (1998-2005)[9]
  • Argentina (1827, 1890, 1951, 1956, 1982, 1989, 2002-2005[9] (see Argentine debt restructuring))
  • Bolivia (1875, 1927[9], 1931, 1980, 1986, 1989)
  • Brazil (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986-1987[9], 1990[9])
  • Canada (Alberta) (1935)[9]
  • 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, 1901, 1932, 1962, 1981, 1983, 1984)
  • Dominica (2003-2005)[9]
  • Dominican Republic (1872, 1892, 1897, 1899, 1931, 1975-2001[9] (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[9])
  • Grenada (2004-2005)[9]
  • Guatemala (1933, 1986, 1989)
  • Guyana (1982)
  • Honduras (1828, 1873, 1981)
  • Jamaica (1978)
  • Mexico (1827, 1833, 1844, 1850[9], 1866, 1898, 1914, 1928-1930s, 1982)
  • Nicaragua (1828, 1894, 1911, 1915, 1932, 1979)
  • Panama (1932, 1983, 1983, 1987, 1988-1989[9])
  • Paraguay (1874, 1892, 1920, 1932, 1986, 2003)
  • Peru (1826, 1850[9], 1876, 1931, 1969, 1976, 1978, 1980, 1984)
  • Surinam (2001-2002)[9]
  • Trinidad and Tobago (1989)
  • United States (1790, 1933)[9]
    • 9 states (1841-1842)[9]
    • 10 states and many local governments (1873-83 or 1884)[9]
  • Uruguay (1876, 1891, 1915, 1933, 1937[9], 1983, 1987, 1990, 2003)
  • Venezuela (1826, 1848, 1860, 1865, 1892, 1898, 1982, 1990, 1995-1997[9], 1998[9], 2004)
Asia
  • China (1921, 1932[9], 1939)
  • Japan (1942, 1946-1952[9])
  • India (1958, 1969, 1972)
  • Indonesia (1966, 1998, 2000, 2002)
  • Iran (1992)
  • Iraq (1990)
  • Jordan (1989)
  • Kuwait (1990-1991)[9]
  • Myanmar (1984[9], 1987[9], 2002)
  • Mongolia (1997-2000)[9]
  • The Philippines (1983)
  • Solomon Islands (1995-2004)[9]
  • Sri Lanka (1980, 1982, 1996[9])
  • Vietnam (1975)[9]
Europe
  • Albania (1990)
  • Austria-Hungary (1796, 1802, 1805, 1811, 1816, 1868)
  • Austria (1938, 1940, 1945[9])
  • Bulgaria (1990)
  • Croatia (1993-1996)[9]
  • Denmark (1813)[9]
  • England (1340, 1472, 1596)
  • France (1558, 1624, 1648, 1661, 1701, 1715, 1770, 1788, 1812)
  • Germany (1932, 1939, 1948[9])
    • Hesse (1814)
    • Prussia (1683, 1807, 1813)
    • Schleswig-Holstein (1850)
    • Westphalia (1812)
  • Greece (1826, 1843, 1860, 1893, 1932)
  • Hungary (1932, 1941)
  • The Netherlands (1814)
  • Poland (1936, 1940, 1981)
  • Portugal (1560, 1828, 1837, 1841, 1845, 1852, 1890)
  • Romania (1933, 1982, 1986)
  • Russia (1839, 1885, 1918, 1947[9], 1957[9], 1991, 1998)
  • Spain (1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939[9])
  • Sweden (1812)
  • Turkey (1876, 1915, 1931, 1940, 1978, 1982)
  • Ukraine (1998-2000)[9]
  • United Kingdom (1749, 1822, 1834, 1888-89, 1932)[9]
  • Yugoslavia (1983)

References

  • 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.
  • 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.

See also

References

  1. ^ Eichengreen, B.; Hausmann, R. (2005). Other People's Money: Debt Denomination and Financial Instability in Emerging Economies. Chicago: Univ. of Chicago Press. ISBN 0226194558.
  2. ^ Borensztein, E.; Panizza, U. (Nov. 10, 2010). "The Costs of Sovereign Default: Theory and Reality". VOXLACEA. {{cite web}}: Check date values in: |date= (help)CS1 maint: date and year (link)
  3. ^ a b c Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This time is different: Eight Centuries of Financial Folly (p. 54ff) publisher=Princeton University Press. ISBN 0691142165. {{cite book}}: Missing pipe in: |title= (help)
  4. ^ Firzli, M. Nicolas J. (2010). "Greece and the Roots the EU Debt Crisis". The Vienna Review. {{cite journal}}: Unknown parameter |month= ignored (help)
  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. ^ Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This time is different: Eight Centuries of Financial Folly (p. 23, 87, 91, 95, 96) publisher=Princeton University Press. ISBN 0691142165. {{cite book}}: Missing pipe in: |title= (help)
  9. ^ 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
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