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Feb 26, 2010 • Thinking Economically • 173 Views    No Comments

Seeing current concerns about the money owed by Greece, I wondered about her past record.  Until 1932, it was not good.  The first report of Greece defaulting on her debt was during the fourth century B.C.  At the time, ten Greek municipalities defaulted on their debt to the Delos Temple. More recently,  Greece defaulted five times: 1826, 1843, 1860, 1893, 1932. 

Even worse, Spain holds a “default record” with seven nineteenth century defaults after having six defaults during previous centuries.

These default records led me to wonder why investors still buy these securities. I found the answer by looking at the actual and potential returns which sometimes are more lucrative than more secure securities.

The Economic Life

Alexander Hamilton surely knew about sovereign debt defaults and wanted to avoid them. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit.  His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt.  It worked.  Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt. 

Sovereign debt: government debt;  money owed (or guaranteed) by a country to investors who purchase its bonds.

 

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