財經觀察 1849 --- Sovereign defaults

Sovereign defaults

Published: March 16 2009 09:09 | Last updated: March 16 2009 22:15
Sovereign default: two terrifying words for every cossetted generation of financiers. But defaults can, and do happen – and not just to subprime borrowers such as Belize and Ecuador. France shrugged off foreign creditors eight times between 1500 and 1800, while Spain defaulted 13 times between 1500 and 1900. How these notes ever attracted the sobriquet “risk-free” is a mystery. While corporate debt markets have been pricing in the mother of all meltdowns for months, government bonds have not. And, yet, defaults are bound to increase.

The first reason is obvious: deteriorating public finances. The cost of recapitalising banks has blown a hole through many a national budget already weakened by falling tax receipts. A Bank of England study three years ago found that sovereign crises erupt in recessions, when external debt has been over two-thirds of gross domestic product, and where the fiscal deficit exceeds about 2 per cent. Each of those boxes gets a tick.

The second reason is that we are all in this together. In the past, regional support systems averted the odd crisis: as one country got into scrapes, a neighbour in surplus helped out. Now, about a quarter of S&P’s rated sovereigns are on negative outlook – the highest proportion ever. Furthermore, in spite of warm words at the G20 summit, expecting supra-national agencies to solve everything is rash. As Bedlam Asset Management points out, the International Monetary Fund has lent about $55bn since mid-2008 – about a third of the amount America has put at AIG’s disposal.

Finally, the stakes are low. As no court can enforce payment, the theoretical penalties are a period in the sin bin and higher borrowing costs when foreign lenders relent. But delinquent borrowers in the 1990s, such as Russia and Ukraine, soon returned to the market. And just three years after Argentina’s fifth default in 2001, spreads on its bonds over US Treasuries had reverted to the emerging-market mean. Lather, rinse, repeat.