The case for sovereign default

THE word ‘default’ (or its less pejorative technical equivalent, ‘restructuring’) sends shivers down the spines of our policymakers and citizens alike. It shouldn’t. Sovereign default, in an economic sense, means a government reneging on its obligations. Per this meaning, almost all governments of the world have indulged in some form of default in their history. Surprise inflation can materially erode the real value of local currency bonds; and governments can dramatically reduce the quantity and quality of public services they provide to citizens. Both are examples of ‘soft’ default, even though their effects may be far from soft. The difficulty, it is said, is with ‘contractual’ default, or ‘debt restructuring’, ie, the government telling its creditors it cannot pay per the terms of the original debt contract. Surprise, surprise. This is exactly what we have been doing with our official creditors for 15 years, telling China and the Gulf states every five years that we have run out of capacity to repay so they should extend/rollover their loans to us. True, we have pre-empted contractual default because these ‘friendly countries’ have bailed us out, but let there be no illusion that these were, de facto, debt restructurings.