Carmen Reinhart writes: \u00a0When it comes to sovereign debt, the term \u201cdefault\u201d is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt. indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution.<\/p>\n
Like so many other features of the global economy, debt accumulation and default tends to occur in cycles.<\/p>\n
The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.<\/p>\n
Such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts.<\/p>\n
Global economic conditions \u2013 such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China \u2013 play a major role in precipitating sovereign-debt crises. Peaks and troughs in the international capital-flow cycle are especially dangerous.<\/p>\n
For some sovereigns, the main problem stems from internal debt dynamics.<\/p>\n
Greece\u2019s situation is all too familiar. \u00a0Greece defaulted on its obligations to the IMF. That makes Greece the first \u2013 and, so far, the only \u2013 advanced economy ever to do so.<\/p>\n
But, as is so often the case, what happened was not a complete default so much as a step toward a new deal. Greece\u2019s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras\u2019s government to implement difficult structural reforms and deep budget cuts. Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it.<\/p>\n
Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a\u00a0comprehensive restructuring\u00a0of its $73 billion in sovereign debt. Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default.<\/p>\n
Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. During China\u2019s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world\u2019s commodity exporters, including large emerging economies like Brazil. Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013.<\/p>\n
But the US Federal Reserve\u2019s move to\u00a0increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt.<\/p>\n
From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn\u2019t count on it.<\/p>\n
Carmen Reinhart writes: \u00a0When it comes to sovereign debt, the term \u201cdefault\u201d is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt. indeed, even some Czarist-era Russian bonds were eventually (if only … Continue reading ![\"Sovereign](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2016\/01\/Sovereign-Debt.jpg\")
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