Sovereign debt has a pretty poor record

Published in the Financial Times.

Sir, “Nations have historically been the world’s best credits,” says your report “Supranational debt issuance on a high” (Aug. 10). This sanguine view is contradicted by Lex in the same issue: “the ‘doom loop’ between sovereign bonds and banks … remains intact” (“Sovereign debt/banks: risk, waiting”). One of these statements must be wrong, and the wrong one is the former.

In fact, the history of sovereign debt is pretty poor. Carmen Reinhart and Kenneth Rogoff, in This Time is Different, count over the past two centuries 250 defaults on external sovereign debt, which have of course continued up to the present. Sovereign debt created a financial crisis in Europe in this century; in Russia, Asia and Mexico in the 1990s; and a global debt crisis in the 1980s. There were vast sovereign defaults in the 1930s.

Max Winkler, in his Foreign Bonds: An Autopsy, summed up the history as follows: “The history of government loans is really a history of government defaults.