Debt Deja Vu
Again, Greek debt was in the news. This time, though, the focus was other defaults. For as long as nations have existed, they have borrowed money and then been unable to repay it. The first report of Greece defaulting on her debt was during the fourth century B.C. At the time, 10 Greek municipalities could not repay what they owed to the Delos Temple. During the past 2 centuries, Greece defaulted five times: 1826, 1843, 1860, 1893, 1932.
Who else has defaulted? We could look at Mexico. In 1982, she could not meet her debt obligations, and then again in 1994. 4 years later, Venezuela, Russia and Ukraine were at the center of a debt crisis. Then, in 2002, it was Argentina.
Looking at more than 50 nations during several centuries, this paper from Kenneth Rogoff and Carmen Reinhart explains the default story. It also tells us that countries that have never defaulted include the U.S., Canada, New Zealand and Australia; the Scandinavian countries; Taiwan, and Singapore (p. 14). In another study, scholars say that since 1830, the world has undergone 8 “default waves” in which “bunches of countries” have been unable to repay what they borrowed (p. 4).
The message? The current European debt crisis is not unique.
The Economic Lesson
Sovereign debt is money borrowed by a sovereign government. Governments borrow money by selling “IOUs” to individuals, businesses, banks, and other governments. The IOUs are different types of government bonds.
When people refer to sovereign default, they mean the borrower is not adhering to the original IOU contract in some way. The borrower might not be paying interest that was agreed upon or the principal or may have moved the maturity dates to a later time.
An Economic Question: Why might Alexander Hamilton have said that a nation’s debt is a blessing as long as it is not excessive?