'('1 Rohcrt W. Kolb 2016 For, . " ..

. copy, ight ol 111d1v1dual articl"s I'I" . I'

All . ,1 ' ' ' .
. 11g_1ts ,e_sc,ved. No part ol'this publication .
~ .. , cdsc re er to tl
.
A k
lC C nowled"Cl1lC!llS .
"'
'.'.i;:1:s_rn,tt~d 1n any form or by any means. ckct;::~rc he r:!11:odt'.ced, stored in a retrieval system. or
Contents
e1w1sc withoul the pnor permission ol'thc publisl1~~-~ch,m1cal, photocopying. rccording. or

l'uhlishcd hy
Ldward Elgar l'uhli,hing Limited IX
11 ck11n1\'lcclgc111cnt.1
I hc Lyp1atl s Xlll
l11tmc/11ctio11 Robert W. Kolb
15 I .ansdown Road
Chcltcnham
Cilos C,L50 2JA PART I THE THEORY OF SOVEREIGN DEBT
UK
I. Robert .I. Barro ( 1974 ). Arc Government Bonds Net Weallh' 1'.
lidward Elgar l'uhlishing. Inc. ,~ -~ .!011mul o/Politicol f,'co11om1'. 82 ((1). November-December.
William Pratt I louse
9 Dewey Court I 095- 117
Nmt!H1mpto11 / ,. 2. Robert J. Barro ( 1979). 'On the Determination ol'the Public Debt',
Massachusctts () \ O(,O .!011mo! o/Politirnl !Tco110111y. 87 (5. Part I). October. 940-71
USA ]. Martin Feldstein ( 1985), "Debt and Taxes in the Theory ol'Puhlie
Finance', .Journal o/1'11hlic !:'rnnnmics. 28 (2). November. 2]] 45
4. Jonathan Eaton and Mark (icrsovitz ( 1981 ), 'Debt with Potential
Repudiation: Theoretical and Empirical Analysis'. Rc1ic11 of'
A catalogue
.I rcrnrd i(ll' thi s. l100 k L'rn110111ic S111clics, XLVIII (2). April. 289 309 71
is ava1 able from thc [\1111 .,I 1 L'l1nary 5. .Jonathan Eaton. Mark Ciersovitz and Joseph E. Stiglitz ( 198(1). 'The
I I ,-
I. i / Pure Theory ol'Country Risk'. Fwo11('C/II Fcono111ic Ncl'icw, 30 (]),
Library ol'Congrcss C t. IN .Junc,481-513
. . . on I o umber: 20 I (1949<)2 I
6. I lerschel I. Grossman and John B. Yan 1luyek ( 1988). sovereign
Debt as a Contingent Claim: Excusable Default. Repudiation. and
Reputation', ;/111C!'ico11 f:'co110111ic Rcl'il'll', 78 (5). December.
108897 125
7. Jeremy Bulow and Kenneth Rogoff ( ! 9WJ), sovereign Debt: ls to
Forgive to Forget' 1'. 1/111crico11 fc'co110111ic /?('l'ic'11, 79 (I). Mmch.
4] 50 135
8. Jeremy Bulow and Kenneth Rogoff( 1989). 'A Constant
Recontracling Model ol' Sovereign Debt . .!011mul o/Politicol
1~rn11om1. 97 ( 1). February. 155- 78 143
l)_ Harold L. Cole and Patrick J. Kehoe ( 1998). 'Models of Sovereign
Debt: Partial versus General Reputations'. !11tcmotio110! Fco110111ic
Rl'l'ic'11. 39 (I). February, 55 70
I 0. Kenneth M. Kietzer and Brian D. Wright (2000). sovereign Debt
as lntcrternporal Barter'. A111crico11 /:'co110111ic Hl'l'ic1\', 90 Cl). June,
(121-39 183

ISBN (J78 I 785-i(

'057 2 U volume sc:t)
Printed illld bound in Cir .. B... .
c,tt ,1t,1111 by 1 J International Ltd, l'adstow

,.:,
\'i
7'hl' f:'rn11,n11ics o(Sui'Cl'l'ign Dehl I The /:'co11omics o(So1e1eig11 !)eh! I 1//

PART II SOVEREIGN DEBT BEFORE 'J'IIE<' MO ,

DLRN STATE 22. Kenneth A. Schultz and Barry R. Weingast (2003), The
Democratic Advantage: Institutional Founcfations of Financial
I I. John M. Veitch ( 198(1), 1>wpuc _, 1. .
tal!ons rnd C' t' . Power in International Competition', /11/cmulio11u/ 01gc111i:::ulio11,
Medieval Stit'' ;1111 . .c
I /1(1 1 O1 I'. COIi
- '
. ' ff.
on 1scat1011s by the 485
31 (1 ' ~ '.
. , /}/JI/( - IS/or]', XLVI ( 1), March, 57 ( 1), Winter, 3-42
23. Sebastian M. Saicgh (2005)~ ~[)o C'ountries I-lave a ~~r)c1nocratic
12. 205
J. ~r:1c'.l<m'. De Long and Andrei Sh!ciler ( 1991 , '_. , , . , Advantage"'? Political Institutions, Multilateral Agencies, and
Mc,ch,l!lts. h1ro1)'"lll
, ~, c,t y ('11owt1
- I bI' - I - ), [ IlllCCS ,llld Sovereign 3orrowing', Co1111Jc110/il'e Po!ilicul S111clics, 38 ( 4 ), May,
Rcvolution',.Joumu/ 0 .1 m. . c mc.t ic Industrial 525
(171 702 ./ , 1 017d l:rnnomic.i, XXXVI (2), October 3(i(J 87
24. David Stasavagc (2007), 'Cities, Constitutions, and Sovereign
13. James Conklin ( 1998) 211
' , r1 1c, 111cory ol , s . Borrowing in Europe, 1274-1785 ', /111cmalio11e1/ 01go11i:::utio11,
under Philip JI', .foumu/ o/P .. I , ovc,ctgn Debt and Spain 547
48'\- "I' . 1I/le <I l:cu1101111 106 (,) 61 ( 3 ), Summer, 489 525
- ., ., o ., -1 . -I unc,,
25. Candace C. Archer, Glen Higlaiser and Kml DcRoucn Jr. (2007),
14. 243
1:1auricio Drelichman and llans-Joachi 'Sovereign Bonds and the "Democratic Advantage": Docs Regime
Sustamablc Debts or PIT 11 1P II A ReconstnIll Voth (2010), 'The
t , . Type Affect Credit Rating Agency Ratings in the Developing
r'os1t1011, I 5Ci<1-159(,1 J . . , Ic 1011 of C astlic's Fiscal
, o11111ulof lci 11101111 11 . World?', Jntcmo/ionul 01gu11i:::olio11, 61 (2), Spring, 341-65
December, 8J3_ 42 ~ c 1.110,:i, 70 (4),
274 2(1. Cilcn Biglaiser and Joseph L. Staats (2012), 'Finding the
15.
M~1uricio Drcl~chman and Hans-Joachim V . . "Democratic Advantage" in Sovereign Bond Ratings: The
the Borrower lrom I !ell D l t. I , oth (20 I I), Lcnd,nf--', to
. . e) dill Dehl1It . I C- Importance of'Strong Courts, Property Rights Protection, and the
l:co110111ic .fo11mul, I 21 ( S'i7) [-)-- ' ,nt1cAgeofl'hilipll',
. - - , ccember, 1-?()"-' -1 7, techrncal
. Ruic of Law', lntemolionu/ 01go11i::alio11, 66 (3), Summer, 515 35
appendix
304 27. Emanuel Kohlschecn (2007), 'Why Arc There Serial Deliwltcrs'!
16. Mauricio Drelichnl'l11 1nd 11 . Evidence from Constitutions', .!011mol ufim, ond /:'co11omics,
Dcl'aults, Serial Pro'iit: R t <lns.-.Joa~hnn Voth (201 I), serial
. . . c u1ns to Sovcrc1g L 1 . 50 (4), November, 713--30
,S pam, 15(16- I (1()()' 1,. _ . . . ' n enc Ing 111 I labs burg
' ,.\IJ 11)/(1//0II\' Ill f,' 0110 ' 28. Juan Carlos I-latchondo and Leonardo Martinez (2010), 'The
.January, 1 19 A 1111c I /1.110,:l', 48 ( I L
Politics ol'Sovcrcign Dcf'aults', L'conomic (}11111/cr/\, % U), Third
17. Mauricio Drclichman and I I - . 332
Sharing with the M -, I ,:ns-Joacl11111 Voth (2015), 'Risk Quarter, 2 1) 1-317
, 0n<11c1: (ontlll"' t [),[ , 29. /\tif' Mian, Amir Sufi and Francesco Trcbbi (2014 ), 'Resolving Debt
Defaults in the A12,c or , . . _"'.,en c 1t and Lxcusablc
~ 11ll 1Ip II i 'l)(i 1)-()0' ('/' . Overhang: Political Constraints in the!\ ticrmath of' Financial Crises',
.Ianuary, 4t) 75 ' - 0
, 10111clncu, 9 ( J ),
/1mcrico11 f:'co110111ic ,!011mal: ,\!ocme'Co11n111ic.1, 6 (2). April, I 28
I 8. Larl .I. I Iarnilton ( 1947) 'O . . 351
in Western hm111 ,' I , . I 1g1n and Growth of the National Debt
, C ' / 1/1('/'/('(II/ 1: . . I . PART IV SOVEREIGN DEBT: TIIE LONG VIEW
118 30 , l Ii/Willie ?e,zc,r, 37 (2), May,

19. David R. Weir ( 1989) , 1ont1ncs

. . J" , , , . 378
. l'ubl1c . 30. Mark Dincccco (2010), 'The Political faonorny of'Fiscal l'rudcncc
l'l'ancc and England I(i88- I 78t: 111,lll~c, c1m1 Rcvolul!on in
XI IX ( J J 1\11 I ' - > '.Jnimwl of l~co110111ic I !1111111 in llistorical Perspective', /:'cu11umic.1 u11cl f'ulilics, 22 (I), March,
' ' , arc 1, 95-124 - ., 705
391 I 3Ci
PART III 31. M il'iiael D. Bordo ( 1999), 'I ntcrnational Rescues ycrsus lbi louts: !\
l'OLITICAI INSTIT Li flONS AND SOVEREIGN DEBT
' j llistorical Perspective'. CuroJoumal, 18 (3), Winter, 3(1] 75 741
32. John Joseph Wallis (2000), 'American Ciovcrnrncnt Finance in the
20. Douo,lass e, N 0 tl 1 , I . 11__ .
, 1c, ' ,llll l3c1 Y R. Werngast ( 1989 'C . - Long Run: 1790 to J 990', .Jozmwl o/h'co110111ic l'cn11ccli1'es,
,llld Comm,trncnt The L:vol . , . . ), onst1tut1011s 754
Choice in Scve11t~c11tl1 C', tut_101l1ot lnst1tut1ons Ciovcrning Public 14 (I), Winter, CJ I -82
- en u1y -nohnd' 0
; 01111111
. / . -- 33. Carmen M. Reinhart and Vincent R. Reinhart (2015), 'Financial
/ !is/or\' XI IX (4) [) l ,. ' ' of l:co11n111ic
. -' ' , , cccm ier, 80.l 12 Crises, Development, and (irowth: /\ Long-Term Pcrspcl'livc',
21. David Stasava 12 c ('()()')) '(' l<.:ll)C
, l l I (: Olllllllln't'
. 423
C - -, I I IViJr/d /Jo11k I:'cunumic Rc'l'icll;. l11111wl lia11k Co11fi,rc11ce 011
Lu1opc: North and Wc11101st R,' , I' icn 111 :ar y Modem
'=' C\ 1s1kl , Journ ii f I , 1 . /)c\'clo1J111c111 /;'cono111ics "T/;c Ruic u(Tlworl' in nc,1clo1J111c111
w11 I U1gu111:::u/1011, 18 ( 1), !\pnl, 155 8(1 t o Al\\, ,cn1101111c I
453 J:'rn11o111ics ".J1111c] 3. ](}/.I IVi1s/1i11gtn11 !J.C .. 29 (Supplement I),
April, S5J-S7Ci
\'iii
Tl1e !:'rn110111ic.1 of'So1ere(r.!:,1 Dehr I

34. Carmen M. Reinhart, Vincent R R , ,

(2012) 'Public DeLJt ()v 1
. , L
s111cc 180()', .Jou ma/ o/I.'cm
. emhdti and Kenneth S. Rouoff
c1 iangs: Adv . , , I E ,
.. [> c1ncc, - conomy Episodes
. . b Ac1knowlledlgements
(19-8(1 ~ c s, 2"o (".) ), Summer,
iomic <'l'Vf!Cc/iv,

35. Moritz Schularick and Ahn fVI r I 800
[> . ' ayor(2017)'(',1 ,
,ust. Monetary Policy L, ,., , - 1ec it Booms Gone
'
187 0-2008', Americcm F.cvc1age Cycles 'll If"
.. ., ' l ( tnancial Crises,
,cononnc Rel'icw 102 (7) A The editor and publishers wish to thank the authors and the following publishers who have
, - , pnl, 1029(1! 818
kindly given permission !'or the use or copyright material.

American Economic Association !'or articles: Earl J. l-lamilton {194 7), origin and Growth or
the National Debt in Western l'.urope', A111crirn11 1,co110111ic He1in1. 37 (2), May. 118 30;
llerschcl I. Grossman and John B. Yan I luyck { l 988), sovereign Debt as a Contingent Claim:
Excusable Dcf:rnlt, Repudiation, and Reputation', ;lmcrirnn f:'co110111ic Re1in1, 78 (5),
December, l 088--97; Jeremy Bulow and Kenneth Rogoff{ l 9W)), sovereign Debt: Is to Forgive
lo Forget?', AmC'l'irn11 f:'conomic Rnie11, 79 { l ), March, 43-50; Kenneth M. Kietzer and Brian
D. Wright (2000), 'Sovereign Debt as Intertemporal Rarll:r', 1l111crica11 f;conomic Rc1in1, 90
Cl), Ju!1l:, 621 39; John Joseph Wallis (2000), 'American Government Finance in the Long
Run: I 7C)O to 1990', .!1111rna/ r>/' /:'co110111ic Pers11ccti1cs, 14 {I), Winter, (ii 82; Moritz
Schularick and Alan M. lhylor (2012), Credit Booms Gone Bust: Monetary i'olicy, Leverage
Cycles, and Financial Crises, l 870 2008 ', A 111crirn11 l:'co110111 ic Rc'l'iCI\', I 02 (2), Apri I, I 029
(1l; Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff (20 I 2), 'Public Debt
Overhangs: Advanced-Economy Episodes since 1800', .!oumu/ o/Frn110111ic l'cl'S/h'c/i1es, 26
D), Summer, (19-86; Atif' Mian, Amir Sufi and 1:ranccsco Trcbbi (2014), 'Resolving Debt
Overhang: Political Constraints in the Aftermath or Financial Crises', :l111cricu11 /:'n1110111ic
.lozmw/: 1\Jfacmeco110111ics, 6 (2), April, I 28.

Blackwell Publishing Ltd for articles: I larnld L. Cole and Patrick .I. Kehoe ( 1998), Models or
Sovereign Debt: Partial versus Cicncrnl Reputations', /11tc>mutionul !:'rn110111ic Rnh11, 39 (I),
February, 55 70; Mark Dincccco (20 I 0), "The Political 1:conomy ol' Fiscal Prudence in
Historical Perspective', /:'conomics und l'olitics, 22 {I), March, l 16 (http://onlinclibrnry.wilcy.
corn/doi/10. l I l 1/j. !4(18-0343.2009.00349.xffu\\); Mauricio Drclichman and I !ans-Joachim
Voth (201 l ), 'Lc1~di11g to the Borrower from llcll: Debt and Dcll1ult in the Age ol'l'hilip II',
L'conomic .!011maf, 121 (557), December, 1205 27, technical appendix {http://onlinelibrnry.
wi\cy.com/doi/10. l l I l /j. J 4(18-0297.201 l .02442.x/!'u 11 ).

Cambridge University Press for articles: John M. Veitch {198(1), 'Repudiations and Conlisc:1tions
by the Medieval State', .!011muf o/Lco110111ic lli.1ton, XLVI {I), March, JI (1; David R. Weir
( 1989), 'Tontincs, Public hnancc: and Revolution in France and I!ngland, 1(188 I 7SCl',./o11m<1/
0 /' l:'rn110111ic !!is torr, XLIX { l ), March, 95 l 24; Douglass C. North and Barry R. Wcingast

( l 9W)), 'Constitutions and ( 'ornmitmcnt: The l:volution or Institutions Ciovcrning Public ( 'hoicc
in Scwntccnth-Ccntu1y E11gland',./011mo/ o/Frnnomic l/i.1ton-, XLIX (4), lkccmbcr, 80J 32;
Kenneth A. Schultz and Barry R. Wcingast (2003), 'The Democratic Advantage: Institutional
Foundations of'Financial Power in International Competition', /11tcmotio110/ 01;1.1,ani::otion, 57
{ l ), Winter, 3 42; Candace C. Archer, Glen Biglaiscr and Karl DcRoucn .Jr. (2007), 'Sovereign
 '"'"'"'&'''

. o1..,o
T!,e f:'cu1101111cs c 1,' ,,ei"II
h
/)chi
-
I .ri
The Economics of'Smereign Ucht I

> l I'. Debt' Joumof o/Po!iticol h'rnnomr. 87 _( 5.

l3onds and the "Democratic Advantage": Does Regime Type Affect Credit Rating Agency L3, .. ( I 979) on the Determination ot the r LD tc .. IT( I 989) . /\ Constant Recontractmg
Ratings in the Developing World?', !11ternatio11al Organi:::ation, 61 (2), Spring, 341-65; Davi~l l>.'1111t1 (ll) Octol;er 940-71; Jeremy Bulow and 1<.en:1eth Ro:~7 (I) Felmiary, 155- 78; .I. Bradltml
Stasavage (2007), 'Cities, Constitutions, and Sovereign Borrowing in Europe, l 274--1785 ' '' '
Model of Sovereign Debt',.''.0111110 u .<~ I. ic_i,.
D , L "111d Andrei Shlctler ( Jl)l)J). I 1111ces
:rnd
l/1'/'(i/lcml0/11\,7' .
l'Vl~rclwnts: European City C,rowt l le o~~
ltr,
lntemutio11a/ 01ga11i:::ation, 61 (3 ), Summer, 489-525: Mauricio Drelichman and I \ans-Joachim . . .. XXXVI (2). October. (171 7(L.
Voth (2010), "The Sustainable Debts or Philip II: A Reconstruction ot'Castile's Piscal Position, c one, I O f'I 0 \\' u11</ lco1101111<.1,, /, . . , J . I of
the Industrial Revolution' . .loumu . '. . f)bt tnd Spain under PI 11 l1Jl 11 0111110
15(1(1 15%', .!011mal of l:'co110111ic //isfOI'.\', 70 (4), December, 81] 42; Glen Biglaiser and 1'tmesC'onkI1n(l9lJ8).. 1
, .- 1 ic, TI le( 1
, ry ot Sovereign
- c \\tohlschecn(200
' ) WJ -v /\re I here
, .
.
-, I , 481 'i I 1 1'.IJH\lllle ' -
7 1 . so (-\)
Joseph L. Staats (2012), 'Finding the ''Democratic Advantage" in Sovereign Bernd Ratings: The f'oliticul 1:'co1101111, 106 (_,),um:, - . - . .' ; ,,,wl of I.mi 011</ hconollll<.I,
Importance of Strong Courts, Property Rights Protection, and the Rule of'Law', fntemationaf
Serial Defaulters'' Evidence I.rorn c nst1tullons 0 1 -'

01gu11i:::utio11, 66 (3), Summer, 515--35. November, 713 30.

Cato Institute l'or article: Michael D. Uordo ( 1999), 'International Rescues versus Bailouts:/\
Historical Perspective', CutoJoumuf, 18 (3), Winter, 363-75. I , co 1 ri"ht holders but tl. . any 1ic1,e
. , . been inadvertently
. f'rst
Lvery elTort has been made to trace all t ll: 1 'y '='I, the necessary arrangement at the I .
. . . . w ill be pleaset to lllcl ,e
overlooked the publtshcis
Elsevier Ltd for articles: Martin Feldstein ( 1985), 'Debt and Taxes in the Theory or Public opportunity.
Finance', .Journul of Puhlic /;'co110111ics, 28 (2), November, 233 45; Jonathan L:aton, Mark
. . the pu. 111 I. I the
. . to. t1c1n,
... wish .
1. ibrary oi' Indiana .. , sit ~i 'it Bloomington,
lJ111vc1.
Gersovitz and Joseph L:. Stiglitz ( 198(1 ), 'The Pure Theory of' Country Risk', 1,11/'0J)('t//l In addJ\1011 1 1s iet s . . . . ..
/;'co110111ic Re1ie11, 30 (3 ), June, 481 513; Mauricio Dreliclm1an and Hans-Joachim Voth (2011 ), . . It
US/\ for their assistance 111 0 1 clII c
llll" these ,ll lie 1cs.
'Serial Defaults, Serial Profits: Returns to Sovereign Lending in Habsburg Spain, 1566 160()'
F:.\plol'iltions in Cmnomic I listor\', 48 ( 1), January, 1-19.

Federal Reserve Bank or Richmond !'or article: Juan Carlos 1-Iatchondo and Leonardo Martinez
(20 I 0), 'The \>olitics or Sovereign Defaults', L'cono111ic Quorterli, 96 (3 ), Third Quarter,
291 3 I 7.

Oxford University Press via the Copyright Clearance Center\ RightsLink service !'or articles:
Jonathan Eaton and Mark Gcrsovitz ( 1981 ). 'Debt with Potential Repudiation: Theoretical and
Empirical Analysis', Re1irn of lfrunomic Stuclies, XLYIII (2), /\pril, 289-309; David
Stasavage (2002), 'Credible Commitment in Early Modern L:urope: North and Weingast
Revisited', .Joumul <>/'I.cm; L'c'()/10111ics, wzcl 01gw1i:::utio11, 18 ( 1), April, 155-86; Carmen J'vl.
Reinhart and Vincent R. Reinhart (20 I 5), Financial Crises, Development, and Growth: A
Long-Term Perspective', Worlcl /Junk L'conomic Rc1icw, 11n1111ul Bunk Co11/i:rencc on
f)ncln11111rn1 Frn110111ic.1 "7'lzc Role o/'7'lzcmy in l>c1elo1111 1c 11 t L'conomics" June 2-3, 2014
Wuslzing/011 IJ.C., 29 (Supplement I), /\pril, S53 S7(1.

S/\GL Publications via the Copyright Clearance Center's Rightsl.ink service for article:
Sebastian M. Saiegh (2005), 'Do Countries llave a "Democratic Advantage'"? Political
Institutions, Multilateral Agencies, and Sovereign Uurrowing', Cu puru/i\'c f'o!iticul Studies.
38 (4), May, 3M 87. 111

Springer Science and Business Media B.V. !'or article: Mauricio Dreliehman and I lans-.loachirn
Voth (20 I 5 ). Risk Sharing with the Monarch: Contingent Dd1t and Excusable Defaults in the
/\ge ol'Philip II, 155() 1598', Cliu111etrirn, 9 (I), January, 49-75.

University
1 of'Chic;igo 1Press !'or articles: Robert .I. Barro ( 1974), '/\re (3ovemrnent Bonds Net
Wcalth' ', .!011mu/ o/'/ olitical h'rn110111y, 82 ( (1), November December, I 095-117; Robert .J.
Introduction
Robert W Kolb

'"for alter :ill. the person who has contrncted debts must pay thc111"
Jane /\usl<.:11, l'crs11usin11

M . .w 01-t c! ts
The . ,c1wash .111 debt. In .its 2015 report !)eh! ancl (Nol /\!11c/J) Dc/1'\'cmging.
1
c'.<. 1'.iscy&Company reported that total world debt was$ 199 trillion in 2014. By now. the
~~ll Id s grand debt total surely exceeds $200 trillion. This worldwide debt includes sovereign
c cbt-- the debt issued by the central governments or the nations or the world. The total also
111 .cludcs the cl e t111ssucc ! by subordinate
12:ovcrnmcnta I units (sue I1 as states all(l mu111c1pal1t1cs

o f the, U t l S ~
11 1 cc . tales). as well as corporate and household debt. .
. Some nations have extraordinary levels of'dcbt relative to the size of'thcir eco110111ics. with
so111cof'tl1-l
. e 11g!1cst relative debt burdens bc111g co11ce11tratcc1Ill tI1c wor Ii' l s Iargcst cco1101111cs.

winch 'tls c1 genera ii y tend to be democratic
J, rat !1er t Iian aut I1ontana11
nat1011s.
As ..I able I shows.
l dpan takes the dubious prize of' being the most heavily indebted nation in the world, ranked
Jy th c ratio of real sector debt to Gross Domestic Product (GD!'). Real sector debt includes
. . dcl1 t 0 r govcrn111cnts at ail levels. household debt. and corporate debt. but 1t
the . excludes debt
issued
, by t!1c, 11nanctn!
. sector. [3nngmg
. . de l11 ol . t!1c 11na11c1a. I sector 11110
. account ma I,cs matters
~~en lllOrC dire, although presumably some debt ofthc financial SCCIOI" might be doubic-COUlltCd,
:/ some debt incurred by financial institutions also finds its place in the real sector. [:vcn by
_1e more conservative measure of'rcal sector debt. the debt burdens arc staggering. Japan owes
four. rimcs its . annual GDP the United Kin12:do111 and the United States owe 252 and 2.11 percent
01 their annual GDP. 1-csi~cctivcly. As Table I also shows. all members or the U7 find their
Phiccs ',11 nong . t 11c top 25 most mdcblcd
. .
countncs.
Sovereign debt accounts for roughly 55 to (10 percent of'thc world's total debt. The Central
11:tligence Agency or the United States estimates worldwide sovereign debt to be $107.5
t-
1 lion at the end or 20 J 4.:' The scale or the world's debt cha! lcngcs comprehension. and
;inging debt into perspective requires comparison with the very largest cco11ornic measures.
c nnu.a] worldwide GDP per capita stood at$ I (1, I 00 in 2014. Thus. the $200 trillion or debt
b~/t'tltutes 12.4 billion person years of' effort. with the sovereign. debt portion exceeding 7
, 1011 years or GDP ror a sinnlc person. In 2012 the value of all corporate stocks wns
dppr oxnnatcly. $(10 trillion. so theb total value of sovereign debt exceeds world equity value by
.norc tl1an 50 percent. Indecd, the debt numbers are so large- 1Iiat 1I1c 011 Iy econo1111c
1 measure
111 la similar range is the GDP or nations. and it is common to assess the level or sovereign
1nc ebt,ec!ncss as a ratio otdebt to GD!'. On tins measure. quite a 1cw countncs . Iiavc sovereign
cl ebt oh!'tgat1ons
, . annual GDP.
that exceed their
. High levels or sovereign debt relative to GD!' seem lo atllict mainly democratic nations
,~tnong the large economies or the world - the United States. the United Kingdom, Japan. and
l 1e nations or the Eurozonc. By contrast. Russia and China. the other two obviously large
xii . o1..,01
,. ,L'I'c,iu11
71,e f:'co110111ics u(S1ne1cig11 Oehl I - T/1e J:'cu1101111cs h Dehl I .\'\'

7i1h/e I --.ime,cign deht 011/r

The 11or/d \' mos/ heul'i/1 incleh!ed co1111lries: u/1 gover11n1e11/, cm 101ate, and Tah!e 2 fndchtedness of'thc \1'0rIcI '.1 Ia,.,
J'<T('\'{
(!('()/1()/lliC.\'
household deht 1
GDP Debt as a
Indebtedness rank Trillions ol'U.S. dollars percentage ol'GDI'
Debt to GDP GDP rank Country
(real sector debt) Country Debt to GDP
(real sector only)

2
~
.l
Japan
Ire land
400
390
(all economic sectors)

517
- 2
3
China
United States
India
17.63
17.4(1
7.28
22.4
71.2
51.3
Singapore (180 4 4.81 222.7
382 Japan
4 Portugal (128 3.62 74.7
358 5 Germany
5 Belgium 43() (1 3.57 13.4
(1 327 Russia
Netherlands 402 7 3.07 59,3
325 Brazil
7 Greeee (187 2.59 95.5
317 8 France
8 Spain 321 2.55 23.9
313 9 Indonesia
9 Denmark 402 2.44 86.(1
302 10 United Kingdom
10 Sweden 5:rn
11 290 I /\1ail:ibJc ;\[: hllps://\1 11 \\ .ci;1.gm /library/
!'ranee 414 , , . '/lie 111!1-ld 1:ur'I I"""'
12 280 Suurcc: Unitr:d St;1tr:s ( r:nlrn J Jn,c
l !Jint:JlCt: sr:d ()c[()bcr II.} -"l) I 'i
;\~.LllC)',
"' I /\:.,
Italy 374 pub[ ic;1tiuns/rr:sourcr:s/thc- 11 orld-laclb<Jo ,/. cccs
13 259
United Kingdom 335
14 252
Norway 435 lcih!e 3 The 1rnr/d \' 11w.i/
1110 ,f
J II ,
c u I Cl!llllll'il'.I' .ioiaeign dcht nnli
15 244
Finland 337
16 238 l)cbt to (if)!'(",,)
United States 2% Indebtedncss rank ( 'ountry
17 233 2(19
South Korea
18 231 227.7
Hungary 286 Japan
19 225 181.0
Austria 277 Zimbabwe
20 225 2
Malaysia 305 (irecce 17-L~
21 222 3
Canada 264 Lebanon 1--12.--1
22 221 4
China 247 Italy 13--1.1
23 217 5
Australia 283 .Janwica 112.0
213 (1
24 Cierm,111y UI.O
274 7 Portugal
25 188 I 19.--1
Thailand 258 Cyprus
187 8
251 I I 8.l)
9 Ireland
Source: i'vlcK1n,cy&Cornp;111y, /Jehl 011<1 !,\'111 :\l11c/1) /Jci,Tc1u.~i11g, i'd1ruary 21115, p. J1111. Availahk at: hllp://\\ "'" Grenada 11 (l.0
mckin,cy.cnrn/111,1~hh/crnn"lll1c _,ludic,/ckbt and ll<Jl much dclc1 crat'.ing. 10

.. lJ ,, . /1<,rld 1:u,'I I""'" I . \, ,11J;1blc at: lillp< '\\ ,, \\ .c i:i.~u\ I ihrary

lJnitr:d Statr:s Cr:nlra 11 ll tcllincncc
.'i11111n,: "' k/ ;\ucnc\,
\: r:sscd Octohcr I I} -"l)J 'i
puhlications/rcsourccs/thc-11 orld-l:iclboo ' cc
economies, have quite modest levels ol'sovereign debt, although China has a high level oi'debt
distributed through its econon1y. Russia defoulted on its sovereign tkbt in J 998, and has been
relatively quiescent in sovereign debt markets since then. , , J'I lnornw.. tI1c11,. cc
I bts J'ully. Nonetheless,
. l
.
eountries makes it clear that ey '
th , lnve no prospect o H
ci\"'Il ible lo carry lug ie
~ I r levels or sovereign de ,t
II . llllllltes such as
Table 2 shows the ten nations with the world's largest economies and their level ol'soven.:ign hwcpt
nations with 1 !are.er economics '. . . t , ~', or countries ,,it- 11 \cl)
snw
cco .,. J'ullv
., 'Cl lll'their
debt as a percentage or GDP. On average, these nations owe 72.1 percent of a l'ull year's ., , , 1.11 1a 11,c -1, . Circece, suggeS s. tl 1'.11 tie
sueeessl'ully. So- the appcai,rncc 1 pros1,e
economic aetivity as their sovereign debt obligations. The range is also striking, varying froi11 . . . , , 101111es, sue 1l .is t
a manageable 22 percent for Chin;1 to a staggering 223 percent for Japan. Not only Japan, but IZunbabwc, or strugglmg eern .. , . , the world\ lar~.c
their
1onoring debts 1s
Sillcl
II , . hrrrc debtors in tcrills J't1tildola1s.1
c ' . ,1 c tu mention the
1not '
a number or other countries carry remarkable burdens, as Table 3 shows . .Japan has the largeSl
As Table 2 makes clear, the tntlyl' ,c O
lS tint became C\'ldCill m- '_
010 l I 111 111 the United
sovereign debt burden or any nation in the world and has the distinction or appearing in bolb eeonomies. The Eurozone l Icl) l 11ro l en , . , , Id\ atte11t1011
. to tl lls. debt p1 o, c .
Table 2 and Table 3. A casual acquaintance with the economics ol'some orthcse highly indebted del'aults by Cirecce, have ea II C(j 1nueh of the ,,rn
 ---~=;;;:::.-

The t'co11umics r!/'So1en'ig11 /Jehr I . o1.\'01 ,c'reif!.II

The /:'cu1101111cs LJeht I
.\Tii

States, the issue is highly contested, at least among politicians, but the debt has continued to
HO O!l
grow, This expansion of sovereign indebtedness typifies most of the world's large economies.
A primary distinction within sovereign debt is total versus net sovereign debt. In many
/()()()
countries,
. tI1c centra I government owes money to its . 1nterna
. I agencies
. or componen ts, Total 0

sovereign debt includes all of those internally obligated funds, while net debt is limited lo debt
owed to parties outside the government. Tables 2 and 3 have f'ocuscd on net sovereign debt. "I
- /,(Jllil
C
0

Fly"'"''"''' Cig"cc I show, the g,owth ;,. lot"I som,;go <lcht as O rc,co,,t,.gc ol'(;l)P IOc '"'. ]
G7 countries over the first years of the twenty-first century. Without exception, the level !""i!l (JIJ
--l.uiopi,'v(.1t111.d1\,1. 1
0
"
debt lo GDP has grown, although in Canada the increase has been modest. For the other six
~-................. l.,11111 S, C.111iilH'.1/l
0 AtlH'I h ,l
.,.
countries ol'the G7, the growth in debt has been substantial. In the United States, for example,
"i'.Jl 10 (/()
...... ; ~
, ,~\uh \.ih.11 ,111/\111t ,1

the rntio of debt to GDP has alrnost doubled from 2001 to 2014, and in the United Kingdom
the increase in this ratio approaches I 50 percent. I,i;i HJ 110
':I'" ~.

"'-..,
- - t,111ltll1 I .i ,\ S, I-Joi Ill /\lr

, J'.i,l A .1. 1 ,V l'.111lll

ir,1

The high level of debt in the rich countries ol'the world and the growth in their debt arc bo ~:.:
. ....... ,.,.., ..,.~:,.
striking. Economists would generally think that less-developed nations would have bcttci th ';j 20 IHI ...... ...
investment opportunities. But not only do developing nations have lower levels of sovereign 1 1(1()()
'.......,_---~~--- .,_,,,"!',

debt, they have not experienced such rapid growth in debt relative to their economics. Of course,
in many less-developed countries (LDCs), poor governance has kept them from being atlra~tive
{l()(j
1nvcstrncnt
opportun1t1es.
. A s a result, their
access to sovereign
debt markets has been 11!11 1tcd.. 2(1111) 2(J()J 2()(),) 2(111 \ 21101 2011) ,'.OOh /(/\!/ .'.\J(IH "'\HI'! 211 JU 2(111 20 I.' ..'.011

The World Bank presents data on the external debt of developing nations and for sets of Yl'<ir

developing nations by geographical area. Figure 2 shows that for most developing nations. c
th . I
. "wailahkat:hllp://tata.\\<>t llnnk .mu/topicic,tcrn:il-dcht.
I <' ,.
levels ol'cxtcrnal indebtedness have been declining in the twenty-first century. (External debt ,
.\011rce: World lla11k, ,. \\;OI .Id I lcvclop111c11t J11d1c:itois, '

J\cccs,cd October 1.1, 20 J 'i /1/I , J/)/)/1 .}/) 13

11 1 -
2',() Figure 2 . nh' I.nu I 1ndehtcd11e1 i
Trenc/1 111 . 1 011
for gm11p1 of dc\'clo1J111'<!,
' ' l-r,111u -l/111t1d l{111J,do111

..... ..... .... . debt owed to c1 cd1t01 . .s out side the debtor
.
nat1011.
) l I , c~ccpt1011 . t1) tills IS the l'Olllltl ll'S ol
le,,c Id: lien d1a111atically. 1 his is due 111
....... -
,'.(l()
1s 1 11c 1 , -c debt levels h,1\ .. ,,vcloi cnt.
. , .. Butcscw ,tl1 11 1 cco11om1c 11~ .
l I ys in the1111linanc111g of
........................... .. .. Luropc and C cntral Asia. 1. I l t li.iroivcncss rathei '
0.

8 "llllS o c
O
I I, such de t P ' I
..... - large part to various progi, 1 l
l . , ld the critica roe 1 1 lie 'UHi institut101w

~
0
0

"~
13 ..I he level ol , these sovcie
. igndc1ts,11
., ,. rcl'ul attcntwn . to tldcbt\ccom1n'
ic .
,, . ddrcss virtua II)'
1 r,(!
. .. , , , . ustif1cs a c,l . j' these vo un c. '
1 .
~ the core act1v1t1cs of states .l . tl , nl'lin co11tnbut1on 11 . . 1 . those articles, this
1
, . I , 1st1lutc le ' . . s1dcrat1011 o 1
features. The art1clcs t ml1 crn, 1 . , turninl'. to a direct co1 1. I . t 1 isc rc11c,1tcdly in any

--------- --- --- ---

D all aspects of , sovereign e
lbtBc01c ., , -d ovcrrll i111g thc111cst1c1, 1 .
f . . adc1iesscs 1 1
,.,three -1.'.l,llll ellncnt and De,1,lll It
~
0
](Ill

--- ------------------~ -- -----------~ c_.,~,,..,~:..::...:..:

introduction
.
d1scuss1on
bncfly
. ot, sovereign . llcll t War, [)eve 1op1 ,

,..:, ',O

\\/
nar . . redit.011e1nclhmj o 1 p1csc 'IYill<>:c
'
(J 'llld SCl'Urity, c!Jcns!J publl~ \_:\)SL' by Cl!ilivatill!!, peace, hll(
).l1()j
!\s a wry important sou1-cc ol strengl 11; woiding occas1011sl ol ~:qliequently prcvcnl much grc_:1te1
LiJOi 2l!Ol
.!()(J', /(JIJ(, it is (() USC it US sparingly
111 as jl_mlSSls)Clil;iltS
1 to prepare Jor l aJll!!,J\t not 011Jy by shunning OCCas\()llS
..'.fJ!J7 .!!JIJH 211{JlJ
~O I() .!()] J also lIia t 1 icly l 1s ui.
rc111emben110 . .. the 1ccu111u l1t1on
' o t c ' 1,t h 11 hie .. hbk
I1 u11<11 ' wa,s
I'11 l"c likewise
Yl',1r 2Ul2 !.Oil
di,burscments ~- to repel it.
. avrn, .11 1 time oi' 'peace lo l I'.isc.'
lnr~e
- ,t1litinkn
1c t c 1 which we oursc11 .c, .
oug,Jit
,)'uurce:
l11tcrna1io11al Moncta,y 1-tmd, 11,,r/d lc'crmomic Our look, J\pril, 2015.

uJ' expense, but by vigorous exertion
. . I thrmiing upon po.stcntv l1lc 1I .
may have occasioned, nut ungcncwus y ( icorgc Wa,hllH'.lon
Figure I frcnclv in lot of sme1'eign i11clehtednC's.1'.fiJr the c;7 nations. 200 I 20 l 4 lo hear. I arewcll 1\ddre,s. 17 '>(,

/)
.niii
. 1 ,, . Tei!sn [)chi I .ri.r
!'lie 1:co110111ics o/So1c1<!1j,11 Deht I The 1:co11om1cs o , o1, , . \hr
\11(1
f 11 , . , financial demands ot World v_ ' .
. o 'rcent ol . GD , . fl.111 1940. I lowcvc1, the . , ) . 1947 As it . had. altc1
, --cnt of C1DI 111 . "
local minimum o i . pc . j ,[ t level up to 238 pcic . )l)i rlicn in spite of cnJ Y c
. , crc1nceJ
II pushed Eng.lane s sov . c- I , , I its debt stcac I y un 11 till(
f'vc years up lo 20 ). 1
0 111
, , t l3ritun rcc ucec . . f> the twenty- 1 . . , 4
previous wars, (ire,\ ' 1 _ 7l) J'crccnt of C,D 111 . y is detailed 111 hgute
l f m 'l to ' , . 111 1,tr s 101 , ,
peace. its debt 0 cl1mbcc 11 10 --f. I U11itcd States tel 1s ,1 s11 . 1 , I st1tcs into the sovereign
[ J . t iry O ( 1e t j' 111d1v1c Lid ' ,
The sovcrewn de it s ' 1- iited the de 1t O l _ rnd the sovereign
~o .'.(Ill
, I States conso 1c, ., , .. r10 pcrccn --, . ,
C

0
c.
Born in debt, as the Urntcc . 111c
1 debt to (iDf 1,1110 c1 - j, J-i'lmilton wrote Ill 1781
1790 s1w a pu ., <, Alcsanc c1 '
."
.!::: J "io
debt of' a new nation, . I . ,
debt of'thc United States ldS
. been con
t1ci\1crsial ever since.

. 1vc will be to us d I '
.
. , nt1011a 1 ~
I l lcssinu .. , I le tlwug lt I
t re1tcr industry among1 1
~ 1
"-
~
0
r . not excess
that "A nation:d debt, I I IS. " ' I could serve as an

me
J 1ccmcnt o /c. '
l . 1788 l lamilton also nolcc t 1,1
, I,t
would be a "'cc111c11t to the u111my1 almR1tilyi11g Co11vcnt1011 of "~(') the whole. over the 1next_
~ Ic1 1Ille-
~- 10()
B
~ the 11opulace. ut ,dt tl le, New 01'. , , ' if' iccumu " debts. . 11. , . dunng . this . pc1, .ll id of
"Sound policy. condemns , . the 11ract1cc,._,( I 1s ' debt. I IO\\ . ,eve , 'r. al . 111tc1v,1 1sf' "hi the ~ war of . "0 - 7
. , i States rcducc:c 1 . . , . ,. sc its debt to 1cc . 1 1
',()
1our decades, the Urntec ' . , I Stitcs did mcic,l. ,, the t1111c, althou:c-
. . I I. the Un1tec . ' . , , n to peop 1c a 1 I. 1I
~ ~
,
generally fall111g debt eves, Jmic wd moral co11cc1 ('onccrn over the debt 01 cc
The enlarged debt was
r great econ( '
CDP rntio to on 1Y
I o pcrccn
. .
t.
, . I !art Benton. On Y \\
iii en
0 2
!(1'J..'. the suroc took the sovcie , -,i"n .
debt toI lly J ficc" in the PIll, of 1
1sc . hom<1s . 1 . 'rlcd
. I is . result of . concc
J H,1 ~
to a crusade lo become .. ,
a 11c,torn w11 <O
I 1t happy day an .
ivc, , winch <! <1" ' ' 1
,. .. The United States actu,1 lly.
Y<,1r
l!l\)2
l'J'I.!. I 1
debt was complete1Y rep, , ud wou _ c, .l tl' , subsequent 1\\c , 'nty yc,11s. , , . outstanding l orn Is \\'ere
.
effort ..
and polit1ca consc . 'nsus ove1 ,icrnary L I 8.1), , , - when t 1c as 1
became f'rcc of sovereign . debt Oil .1di 1 1 1
October
S()11Fce: I .1, 2111 5.
http://w11w.ukpublicspcndin~.co.uk/spcnding. chart I (i<J2_ 20 I 5Ui<p _XXc I Ii 111 ten_ CiOtiltabbcc ccc
I A,, sscd

Figure 3 Net so1ereig11 dehr o(rhe Unirecl Kingc/0111 us u /)('rcrnruge o(GD!~ /6<J] ]01 l.'\l

Om the1 !,mg vweep orhivto,y, vo,eccigo deht h,rn plyed vital rnl, in h,nniog the "sinew~
l\!11

of war. " 1'(Jr

lllany nations
swept away l1y war, t I1c rccor,I o 1 sovereign
ccI tJt 1s
mcomp
lctc an( "
0

"
0
,m!y !>e<vivt,m vlc1rnv !cow '" with detiled "'"' '<mti,nrnv ,eco,d of the debt '.' 0

"
~
acco111pan1cc . I tI1osc mart1a
. I v1ctoncs.
. . If' we cons1c
Ier t I1c two most power Iu I nations th
or c1n111rcs
!Ill

~
or the modern era - first the British Empire and then the United Statcs~\\ie can sec that c ""
''<by!lm," or debt '"'' elovely m1ebec! the de,nndv or w,o Ii nonce in lb, biv101icv of th
h
hn' a

:g
r,11

countries. Figure 3 shows the history of' the United Kingdom\ indebtedness relative to its c.

economy f'rom I(192 to 2015. The dominant feature of' this graph arc the three great spikes iii at
correspond lo the lengthy wars against France surrounding the turn of the nineteenth century, -.:

~
111

along with . the surges due to World Wars I and I I. One can also sec the smaller peaks. 1n the
eighteenth century that accompanied the Seven Years' War ( I 756 --17(13) and the effort to maS!Cr
the nhvhq>e,01,v No,1h Arne,ieoo eolo11iev io wlml !hove hmne, d, ,ende,Hiev dnhhc<l "
American Revolutionary War ( 1775- 1783 ). Adam Smith regarded this1 debt as a grave social 11
problem, writing in 177<i, "The progress of'thc enormous debts which at present oppress. ai'.d ld!JI) J'/Jil J'l(II l'J/11 l'J'III :11111
l"/ 1 111 JH'>il 111/11
will in the long-run probably ruin, all the great nations of' Furope has been prelly uniform."' IHIII IH :11

The British finally achieved a compelling victory against Napoleon in 1815, but these long
years of\var lei\ it with a debt of'237 percent of'Gl)p in 181 r1. In 1923 debt peaked after World . . .. .luh.
lo[Cl!l,ce. .. But j"::-c'I Prn11,..ct1011.
11-T4._rm '0111, .
W,n I I I 8' pmc,,1 o ' Gll p. Bel wcco the two wocld "'.'",. Bci 1oi o in,nl, good pmg, csv '.; \ fJffl( ( ,111~1c""n1c1I
( - lluc
I ")1{)~
''''" eh" go,ipubl1cc1t1Cl11 -I
. i.(lllc
~c ;\CCL''.'>\Ll I (),wher
. ._ I' - ..
_
paying down its debt, 111 spite of a surge that began after the Crash of 1929. I he Unite
I<.i11gdo111 even reduced its debt levels in the later years of' the Circat Depression, achieving a 1-'igur(' 4 . 1I' ,/J1 u I .rI/( , llnitcd Srare.1, /79(}}/)/.)
Net .101ereign
 -,a,-

XX
The Eco110111ics !!/Sovereign Deht I The .
fc'co111!IIIIC.\' 0 1 'sOH' 'li'i'<;II
' !)eh! I .r.ri

rcpaicl.'j This happy state did not persist, and the United States sunk back into debt whe; I ~O

confronted with the Panic ol' 1837. In response, the United States issued debt in October
and has had a national debt ever since. 183
, ..
Nonetheless, the United States did sustain debt levels near zero until the American C'.:\
1
](II)

War. As Figure 4 shows, debt spiked fhim 2 to 31 percent 110111 1860 to 1865. After a bt ic;
plateau, debt reduction began in earnest and continued for almost fi fly years. From 190 to
2
1916, the debt was 5 percent of' GDP or less. Only with World War I did it increase rapidly,
surging from 3 to 33 percent from 1916 to 1922. Again, debt fell, hitting 15 percent in I 9 }:
2
The Great Depression struck, and debt surged to a pre-war peak in the 42-44 percent range;. r,11

The challenge ol' World War II drove debt to its highest level ever, with debt reaching I0 4
percent of' GDP in I 946. As part of' a now familiar pattern, debt fell following World War'.'.
and continued downward lo a post-World War II minimum of 23 percent. The United Statt:S
achieved these relatively lower levels ol'dcbt even though it began the social support programs
of'the Great Society and fought the Vietnam War. While the Vietnam War had disastrous social
consequences in the United States, the debt reduction that continued through its grimmest years /.{)

shows the limited impact of the war on the U.S. economy.

On the whole, IIom 1974 to 2000 debt drilicd upward, except for a few good years lroin
!II{() ,!{ll'i .'11111
1995 to 200 I, when the level ol'dcbt fell from 48 to 31 percent. During the twenty-first century, I\J'Hl }l)IJ:, !01)() 2011r; .'.01() 2u1r; 20.:0 2(1..''l

Y1,ir
the increase has been remarkable, especially as the United States has not been engaged in any
major war. Lven in years not affected by the Financial Crisis or 2007 -20 I I or the Great . > -"11\'i Rclc,isc. 1\\:1ilahk al: htlps:/1
.. .I u I.
Rc~cssion that l'ollowcd in the wake or the most severe years ol' the financial crisis, debt has Suurcc: ( '011~.rcssional lludgct ( icc, i' () ~to her 11,But21115.
.
)ff,, 1 on~_-10rm \"cl 1'rojccl1011,
t: -

surged. In the United States, the financial crisis passed its zenith in 2010. Nonetheless, IVIVW.d10.U.O\/J1llh\icalioll/45.l08. /\CCCSSCl l , of.(;/)/>: (lc/1/ilf

sovereign debt rose l'rorn 6 I to 74 percent of GDP l1om 20 I Oto 20 I 5. - I I. 1 /Jcrccnlci1;(

, . , '!'eiun dchl I,c IcI II\'
. the p11} ic o.1 i , .
1"ig11re 5 Uni/eel 5/o/cs .IO\ c .. ; , . 15 ]040)
The parallels between the United Kingdom and the United States over all these years (/990-]{}/5) anc/f()IU0.11 (_70
10
approximately 1980 arc striking--massivc run-ups in debt to finance major wars, wi
th
subsequent sharp reductions in debt in the years of'pcace that followed major st;.ugglcs. Recent
. . 1 s unprcccdcnlc( , , l. Further, the forecast .
years also run parallel, with both countries continuing to sec rapid expansion in sovereign debt . . , , . , were already quite Jug l I., , . will continue to expand rclal1vc
compared to the size of' their economics, even though neither has fought any major war. As tl11rty years lrom levels thc1t dti: . tl , United States, the debt .. . democracies will
the ruturc suggests t1iat, cl, t Jc1st
lor ' 111. 1c . tl, rcison to be 1cvc , tint' ot 11c1 11c 11
shown in Figure I, other large economics have also seen recent escalating debt, such as e . . There is 1it c , 1
-
th to the size ol the economy. . l St 1'Sin this respect. tl , c intions conlront a
five other members ol'thc C.i7. This trend seems to affect many other countries that also have
." I , Unite( , cl c. , , is w icn ics ' .
democratic governments and generally free societies. While the countries or the Eurozone behave dtllercntly than tic .. stion: What h,1ppct 1. , current high levels
- ., ,1 cnt1ca 1 quc. ,, St till" lro111 llO\\
exhibit some diversity in debt levels, the overall debt levels have been rising. For the core 1 l'licsc obscrva!tons raise ' , ht .1 major war. '11 . c- . . , cssiry to l'or111 the
9 .
serious gcopoltt1cal , ,or must 11g , t"c
. . c Iia 11 cnge ' surge
- . f'tn,rnc. 'Ill"t:-_ that 1s .nee' . . Iit
(icbl md \11i-(hlig
countries, Eurostat reports gross sovereign debt levels or C) I. 9 percent of' GDP in 20 I4, a
, . . , the critical natUI C O ' . , .. , ~
111
nd -urct1c 1 1,12 ., lsovc1e1i-(n ,, ~
across all 28 Eurozonc countries, the level is 8(1.8 percent ol'GDp_1o Oi' debt, Will they be able to SCC
.
sinews of war? These re 11 cc t 10 ns- crn11h,1s1ze
. . pro1ec
! bt that this . , t '1dd1 csscs.
The historical rhythm of' debt- increases for war, fi.illowcd by a pay-clown when peace the necessity . ol . umk1st,111(
. , 1111 v" sovereign ( c
arrives- -has been upset among the rich democracies or the contemporary world. ;\s a result,
recent years have witnessed the cacophony or rising debt in a time of peace. In spite or living
in a world in which dramatic geopolitical challenges have been in hiatus, the debt or these_
nations has continued to increase. This observation raises the question of the future course Economic Oevclopmcnt - , role in economic
01 . Jehl playel1 1I111 C .
debt. While such forecasts arc notoriously dil'ficult, the research arm of the Congressional . I 11 111!,cts
O J' C'lJ)!ta ' ' ' sovereign l, l!llCnls. Ill,1111ly for the prnsccut1011
Budget Oi'iice (C'BO) in the United States continues to revise its forecast for the levels of'U.S. Pnor to the development ' . , 1 to kiiw:s and govet 1 . I Jy C'llllC to play a large
clevelop111ent. Rather, de lit Wcls'
, 'ldV'\11Cl.:l
' . l, Joiicd, ~ sovereign
(Jcbt (JUIC' '
debt. /\s we have noted, in 2015 the sovereign debt of'the United States held by the public was , '['! 1ll'lrkCtS(c\C 1

74 percent of'(,Dp_ /\s 1-'igure :'i shows, in mid-year 2015 the CBO forecast that this figure will oJ war. I lowevcr, once cap, d
11
rise lo I OJ percent ol' (; DP by 2040. Thus the recent past has witnessed sovereign debt levels role in economic development.
.
. devc Iop mcnt. altc1. the
that arc quite uncharacteristic for a time of' relative peace, and the run-up in debt over the JaSl England's li11anc1al
(!cvcloprncnt of conccntra tcc
' . r (iKX was essential to the
. , . tli, Glorio11s Rcvolutton
c hands ol . .man ciil
1 l. ms With Britain's
11st1tu It
.
1 ' 1
, I c1111ta
' 1 ,n

)
 xxii xxiii
The 1,co110 111 i c.i.. O1,,
'>O\'ffeign Deht I The !:'co110111ics of'S1nerc'i,r>;11 Uehl I

foh!c 4 ,1nvcstn ien t 111 l-at111 J\menca - trom , . I 870s. But this . boom was brought to
,,-, in I,c11111 ;-1 mcricu
/:'arll' .101c:reign hormwi1w . the 1850s to the nm!-
's:n end by the Panic or 1873. which also generated severe finnncial difficulties in the United
' .tatcs 'rnd c1c1 , oss E:urope. In Europe the pro t1Iems pers1ste( I 1or two decades and these hard
Country Year t_1,111 es constituted the original "Great Depression." During such times. funds from the world's
~~~~~----~;---~N~L~11~n~b~e1~-~o~!'~is:s~u~e~s----~:J\~i:n~o~u=n~t
;.; ~b~o~r~n~iv~v~c~d:~
(realized-- British pounds~ Cdpl!al markets to fund development across the world were extremely limited.
Brazil 1825 . Despite the troubles of 1873, lending to developing sovereign nations started to boom again
2
Buenos Aires 1824 2,(100.000
~~l~1~-~'.lrly 1880s. From 18~0 to 1890. British inve~trn:nt in Latin America more than doubled.
Central America 1825 850.000 eicign debt accounted Jor about 45 percent of this total Ill 1890.U Argentina and Brazil
Chile 1822 118.<)<)() :;ere among the very largest of these capital recipients. and they f'cll on hard times in 1890.
Columbia 1824 700,()()()
2 1his, w1s ' I1<11t1cu Iar Iy true o 1 J\rgcntma.
13 rot I1crs, a prom1ncnt
Baring [',nt1s
I1 mvcstrncnt
'
firm.
Guadalajara 1825 5,883.750 -
Ilad serv" ~c! as tl 1c investment banker lor muc 11 o 1 tI1e /\rl(cntmc
cc ! lit issues,
and J\rucntm:1s

Mexico 1825 360,()()()
2 problems quickly became Baring\ problem as well, ~specially as Baring held ~~01nc cir
Peru 1825 3
4. 728,000 Argentina's bonds itscl r. Because Baring was important in the London market. Baring 's
l'oyais 1822 I .491,480
I problems became London's problems in turn, throwing the world"s largest capital market into
I (10,000 turmoil. 11 Argentina's dirticultics were quickly l'ollo,ved by Brazil"s turbulence. Not
surprisingly. the financial stresses at these two largest Latin American borrowers brought this
So11rc<': J. l'red Rippy/'. 1 Total I (i.892.'20 wave of 1OJ.e1gn . 1end mg . to an end.
t:nrer w , , ' )/ ,r1., 1 fmcslnH'I!/\ / . Up until World War I, there was no particular subsequent lending boom l'or Latin /\mcriea.
I '" 111 II, lurdcd ffr,,io111 11dllltIen CTIll .u/111,lmcncu I
'\. I ' -- y,' /I -
,, ,
' ' ,c ion lluuks, I lJ5<J, p.V41J
().' / ('""" .',r 11 d1 in rhe 0/IC'mliolll ofl'ri1,1/L'
2 a nd lending came to a standstill with the advent or war. Sirnilarly. between the two World Wars
capital markets were generally moribund. and f'cw l'unds flowed !10111 capital markets to the
conclusivel . 1815. v1cto1 . .y over ha . nee 1t W
governments of developing nations. After World War 11. richer nations again started to lend
anc 1,ngland directed much . , . aterloo, speculative fi.111 I
America. At first tl1, I , 1 ol these international c111t I 11 c s became plcntili.il in London, aggressively.
. C Odns 1clp' I t r I I d ows ( In addition to private finance. the international financial institutions (!Fis) established in the
struggle against SJY1i11 tl . bi cc o rnance the nasce11t 1. , .. oward Central and South
> ' n1s urnn, tl 1 cvolut10 nd1
, .Y governments in their B~u on Woods system. most notably the World Bank and the lntcrnat1011al ,
[ ,ut soon alter 181,: . , g. 1c 1ne betweens . . Monetary hind
., scvcra 1cou t . ovc1 c1gn d l t !'
great wave of' sovcr"10 I l n 11cs succeeded in becci11 . c 1 or_war and dcvclop111cnt. (IMF) I1ave p Iaycd a major role in financing tI1c governments o 1 l te\'C Iopmg. natwns.
. ,
J\ ltcr
~ 11 cc1t is. t lllll( truly111 l
.
nat1011s and rotci . 0.
-11,1 1ions ol l . (
.
. ' d oo 1 of cco 11 omi, cl
~ eve opm, 1 l1 ~ c epe11dc11t. Thus the first
.
World War II, Great Brit;iin diminished dramatically in irnport,tncc as a supplier of' capital.
11
market. From I 811 t 18.'"' -din America receivccl I . en )cgan 111 the 1820s as the \~hile the United States achieved overwhelming dominance. 1-'clr example, in the J lJ7()s and
. .
1111111011. as 'foblc 4 sl
-- o L5 tot I .
. (' .
.
d. sovereign borrow ~ , 11s iom the London capital
di l(C lcl'l . r- .
1 ) 80s syndicates or larl(c commercial banks in the United States banded together to make
. . . iows. olomlw M, , l11g 111 Lat111 A ,.., 7 niassiv,
.. c Ioans to many governments~ Latin Amenea. Asi:1 a Iso rccc1vcc . I cons1c . Iera I1Ic capita
. I
d 1most all ol these l'und. l , d.. cx1co. Brazil and [),. mc1 ICd was almost t I 111
I -
tl, 1c ,.101. rowers w,.,
s1c1no.11rov1lll
c
,
c cc 1y (J1-c1t B 1. - c1uwcrct1,1- le ,ugcst rcc1111ents wit11
. . inflows f'ollowinl( World War II. Partially as a result ol'thcsc capital inl'usions. smaller Asian
c1cnotthcsamc11. . , n,un.AsTab\4,. . . eountncs . developed ~
cmc1g1n!!. and Ind 11 t ,1t1ons that now exist l1 c d!so 111d1catcs some ot quickly up into the J l)90s. I lowcvcr. both the Latin American and Asian
~ ' 0 yet consol I11 1 , l ccausc t[ , . -
lcndi11 g t1oorns also came to sudden stops. In Latm J\ menca
many lHlJTO\\'Jng countncs had
I.lucnosI
!\ires wis t
' IHJ yet part of A.' .
IC cc some or their 11 ._,. . le J1<1t1011s of'today were still
iescntly 111tc , 1 .
iat icr than being fully. , . igcntina. and Ciu1cl I. 111,1 regions. For example. l11assive financial problems in the mid-1980s. In the late 1990s. Asia had its own crisis. which
. . 111co1 porat, l . ' d <!Jara be .. , .
Sovereign debt ii . cc lllto Mexico. iiiowed on its own account c!uickly became somcthinl\ or a world crisis. and this too resulted in much restricted lending
I, . . ' so p 1<1ycd an .,
ior a time. ~
tic n111ctccnth
t.. . century. () nc of . 11npo1 th, t,mt role in the dcv c,J op1ne11t of'tl l . .
1,mscont111cntal railw ll, . c most ambitious u 1,.. . le J111tcd States dunng As countries in Al'rica became independent in the years and decades l'ollowing World W,tr
. dY, cgun 111 18( 'l . nc c1 lcilrnws II. they too became sovcrcil-':n borrowers. In the case ol'/\frica. much ol'thc lending w:1s granted
J)l~)JC~t was completed in I 8(1;)_ It ., __1. d;1nng the heart or th ~ ,was the building or the
wcstc111 tcnn111us of' tl , .. 1 1<111 !torn Council Bluff l c C ivi! War. tl11s 1.900-lllilc by organizations like the World Bank and the !MF. As a fraction oral! lending. profit-seeking
1 1 ,
111. ,111g San Fnn .., le I<11 nctworl' t0 connect t , 1 s. owa whicl 1 Iiad been the 11rev1ous . 1,cndcrs played a more muted role. The story of/\l1ica is even less happy tlun the history or
, c1sco to New y -i, . o d ocal nil , . _
vital role. providino c1sl t I OI ,. Bonds issued by tl1, lJ ~ . network in California. thus sovcr,cign l1orrowing in Latin America. Excessive Icnt1mg compoum!ccl l1y a poor capacity to
p aci11c and the l Jnioil "' ',. 1 .. 0. t 1c . tw 0 main rai I com!Ylill.,.e . ..S le cIera J government 11laycd a Lise th J\ 1 l 11
D, e lllvested fi.111ds yielded relatively little development Ill nca per CO al' 0 eomm1t111cnt. 1
.. - 1 <1c11c
1 nil. 1 ' cs 1nvo!v, I111111
11ic availability or run .. _ ' io<1c companies_ i.: ec c project, the Central ebt levels in Africa became entirely unsustainable. and have been only partially alleviated by
1
.joined hy c,. .. I.ranee
ic1 in,my, c s !tom
, Ideveloped .. , markets r ..
. c<1p1t,ll .. consi . (I,.,
Cl d bi C debt lorl(IVCncss.
, .
busts ol' these richer t' . <Inc the United States ol't . 11 st the British Empire alone later Latin America and Aliicn suffered liorn broadly similar problems. Many investment projects
na ions Pros pcrous times for r ,en, .rc1lccte cl tl le economic booms' and
Were ill-conceived and failed to generate suflieicnt returns to sustain debt repayments. 1lowcvcr,
IC 11c1 countries J,ecI to heavy sovereign .

)
 " ,._.,,,..f"r,,z,,,
f,-"",-'"... >i ., ,_;.,.~;: ..,,,-; l-~-~-
. ,-t.:-:~.;,.. '"'.--1,""""e,;,"1"'-':){ZJJ, :~":;---:::.:-~- -- -~ --- -- ------_--.---- -__ _

.ui1 . , . 0 /'Sme1cig11 Dehl I .\'.\T

The Econonuc.i
Tlh: /:'co110111ics of'Sov<'1t'1j;11 lJ<'ht I

;n both con,;n,nts, com,pt;on '"d "'P"'' . n,ght . vm, at least. as eoffos,ve. as, pom. mv both
. estment
'j()

plmm;ng aod emuhrn;. Jn many wnys, the poht;,,,, "'"' sodal ;,.,,;1u1;,,,,, or""''"' on,fthe
conhnents wecc ;JJ,p,epmed to ot,h,c
. . ca1vto . Iy, mv! tIt<s
. I , 11ect,ve was JWt'"' ,
, hrly true. c '""
newly ;udepcndent nat,oo, ol Af'nca.
r1 rns, IIte <sstumee o J' sovc,c,gn
dclJt to st nu' ,,er,
11
economic development has often . t
Jecn quite
.
unsucccss u .
t' I I
11 some ins c1 '
. . t ,ices howe
tlie
sovereign
. lc11d111g
. has succeeded 111 . lostermg
, . development, but that ce1 , .ta111ly
. hc1s
, no t been
primary lcitmotif'in the story or sovereign lending to emerging nations.

Default

Default is a major element in the story or sovereign lending, with defaults going bac
I
ble
I t the
'.t:1
M;,1,11, Ages "'"' hey,,,,, . W<t. I< tI<c <evclopment
! of lotnopean
,n,g,
I ! on,s ,ts .
, , idcnll ia,wo.
goeccnmett1ol tmds ;n the med;evnl pcc;od, the wodd of""'"'" stmJs to ,csemble on, '. the
Also, ;n n,;, pcc;,,,1 p<oto ;nvestme,,i bonke,, heg,o to become pn,,n;neot As e,uly "' d<
twdl\b "'".'"Y, the, govennn'.nts of both. Gcn~o. mttl Ven;,'. wcce bmTow;:,g ''."':,,:,'.ng 1 1'JHU I 'J'IO 211111) ..'.O I !J
pnnnn""' "''"'"' In 1339 I,dwmd I II, k"'g of btglmtd, defm,ltcd mtd ""ncd the ", ., ce. lfHHI lllJO lH20 liU(l !H10 lllr:,o JHfitl lH70 !HHO JHlJ(J J'JO{J J'l !() l'J2li !'J HI l'/.10 1":,u l'l/,(J J ,r;u

ho""' or the B,,,,1; ,nnl Pen,,,; ;,, Fl<cncc n, hnm 1300 to 1799, Aost,;a, F"gl,md, F, '"'., Vp.11

l'rnss;n, Pmtngn I, mnl S po; n nII de fan Ited on the;, e"crne I dcht, some or Ihc,n tcpctt<cd lyj ,,s
Some loompcttn rnbs had i;ten,l t ,;<1,ml 1;f, ,nnl death puwc, ovc, the;, subjects ond le",V . . r ,1,1 c'"1111111,s
f1 /)f//<'/'('/1/. ,I,!,
(//Fi11u11<iul f.'of/1.
I I t1il
.
Sr1111,c: C'ann,;n M. Rcmliail . ; j l(,;nncth
, 1,1 ~ss S. Rog~,
:'009, Figure ff' p.
).1. 1'l1is
-J,111<'
70 Scc ,ilsn \Hlll'
.. -o 4 r' ,,. 'idditiona 'c'
so default was not always necessary to deal with debts loo large to pay. For example, Plulip tli l'rinccton: f>rinc,;ton lJn1vcisily 1 ' I W){) to]() I./
of Frnncc 1 chose In ";le h;s lcndc,s mlhc, thou ,;,,,ply defrwlt at the hnn of the o< ,d
ccntrny K I"tI'" "" y pcno,, <nnc, sovc,e,gn >um,wmg was "'t ,c lorn, o govemn f. teenie Figure 6 f'crcenlagc o! /Iii' I I . I ,fault
\\'Of ( ''I IIClliOIII Ill C (
from '
I l I l I f' 1c11t-create
,nmn;,;c,,
I wh;,1, wc,c sold mostly to loc,,I cd;,,,,,_ Some of these anou;t;cs we,s q<H
com11 1catct
. I111 structure antI were surely JJoorly understood by both the borrower ant! tl Jc, lender. 0 T'! .l ../Ille'/\ /)1//crcnt, by Carmen '
Sovereign defaults continued almost as much as sovereign borrowing, through the early rno(1ern , if' 118 countr.,. tcs (!awnfiom
I , s Reinhart n1 and Ro"'"offnotc,-'thcsc. 1 the
pc,;od, w;<h Pb;1;p II or Spn;,, be;og one or the most spcct,cnlo, dcfooltm of oil ,;n<e. . . ,I 18()() to 2014 based on aI sam1:!~ c , 1: "urc 6 shows, an:! cl 1. t wave occurred a1 mint , ,
We hnvc ol,endy ""'"' the fast sovc,c;go ho-uw;og boon, mn,mg the newly li-ce ont,u,<s', Reinhart and Kenneth {ogroff-l(\s . I 1,stinct
It:>
cp1sm cs. fhc
j, l I ,llSNetherlands. 'j'Jco11dW<1VC
ic sc I r I ,
, 11( t ]C
L,t;,, A""';,,, c,uly ;,, <he n;n,tccnll, ""hy. 11 lcnd;,,g hornns, c,m n wnve of dcJOults he defaults fall into five ma,101! '111( (
'1 ltc1s bcin~ /\ustna ,1 . ;\111'11e,1 as ,ilrcady t{iscus'SC( . 111y lC
bch;n,1" The m<swc, to 11,;, qncst;<>n bes been <lrnt they mc os closely <dated '" I ;gb1,,;ng 10 "' Napoleon1c Wars, the nia,10'. ' ( C au
1, , (lent ~ , o f' [''.1tlll , 11criod
' countries ~ when the lJ .S . econo . . the
thn,,dc,, n ""'" pin" 11,nt le,, vcs as ;<l, the qnest ;o,, or eaurnl; 1y. Vc,y q,,; ckly o 11cc the fi<st 0
1
"'! occn<Tcd mnong the, new , ly Ill( cpcn . .,, G,eot I)cp<c , 'Ss1on, ,l , scqncncc ol ,rnn tiact1011s
1
. -111 ,
Lnt ;n Amcc;c,n, '""'" .>h<>w<> ;,, Tobie 4 Wc<c grnntcd, the dcfa,dts began. r;,,, <o dclirnll w"j Panic or 1873 ushc1ed in the o11tg:'l11s1~, which is longer thlan t'(~~11.unct1011 with the l':1111lc oll l'tl1~
187
Pen, ;n Ap,;I I 826, i;ttlc Ht<><c lltnn n yea, nib ;, ccmente,f ;,, ;ndcpcndcncc o1 the Bnttle_ contracted for (i::,- cont111uo
. us mon , 'I , I' hults that cns ' UC( Ill .C 1tions . wh1c Il now lllC Ul C(I tl .
Ayneecho. C'b;I,, Colomb;,, Eemtd,n, "'"' Vcnczncln also nil dclbnlt,,d ;n 1826, nnd Mexte~ 0 ' I 910s r
Great Depression ol the - . /\ nca as the \\C,l 1e ( C ' lth1c1 11, '
,thdic\\ c1ed1t IOlll'I"r ']('()Ulll , JC
i 111
Were also concentratec I 1 itm me 1 financia I Wl ics anc , wt th century ,s (,,tc,l 1 ,, t Depression
. , ,
_jo;ncd the gmnp ;n I 827. A,~cn1;nn, El S,d,ndn,, Gm<temnln, 11,ntdnrns, nnd N;c><rngun c1;,nhc< A . .

aboard the bandwagon of' defaulters in 1828. 20 8y mid-1828, all the borrowers chronicled United States struggle( WI'th thc11 OWicurrcd durmg: the. (Well ICiitrics 111 Lalin (\ cnca \VCIC .
'Ji< hie 4, cxccpJ h llrn,d, wcrn ;n de lb nit." 111f World. The' fourth' great del r01ell! It wavet octwenty yca1 s. I\wun COLi . J 111
"''. l,t, 1cross Europe, me uc ing: r 1 ltccl
{ r \ust11a,
111 the 1930s and lastcc r ilmos . , 1 0 widesprcac ( j lehu ' S' .
. Russia had not 1ly de. au tl s
~
Pedrnps the ntsl ;utc,e:1;,,g c,,nl nnknown rnl,y ;,, ','itble 4 ;, the dc1,,,11;:g "cnnn'.'.'~,~I '
.
generally 111 default, butt ic I re wc1e I Ro11wn1,1. 1,r 01
ult durm~
1 1 Portu~al, an(
,ls ll remained 11 cc c1 1.'"

~ ~
Pnym,. A I 1><od"c1 ol the lchnlc n,rngn<ot,on of Loni t,c,ngc MneGcego,, , Scotlrnb son 1 1
, ,. . Po am, Jchtsl an J<)()(Js when dcf,lll It c. 'rs were
I 111a11 ;
who I long I<t """""' Nnpo Icon ,n
.Spom, f) <>y><
,,,,, e<><nplctcly ,rnn-crntcnt
,So l10t wasf C1crma11y, I t10 l I 'l(i 1c11ud1atet1 Its l
Greece, I lung,uy, "tl1c
11
2
I he speen In h" Ieee, ;n <he London money matlcct, llto < l'oyn;, """ nble to ;ssuc I 60.000 af'tcr the Russian Revo u . 11 )LI! l,.. , 1over the Il)8() s'
. . . 1 vcoccu11c(
periodaswcll.'lhcfiftiw,l . . II 'nLatmr,mc . , , caanc
'\11( Africa,
, ' but also spt c,"I( ac1 ()S,
,
debt.be! h
With thend."
level of'duc diligence that characterized the loan to Poyais, other defaults coulc 11 1
not heh; 1
1 deveJo 11no. nations
. Ioc,l
,, t,c(I 1mnc1pc1 y I . . done. hl1 . . ex,
, 111111lc, /\ust1 le\,
In h,-;c1c,1 lcm, the b;,, n,-y "r soec,e; gn dcht hos been pn<<ci note,/ by lend; ng lmonts ""' Middle Last "' and the Can'[ ncc111.
[ " . . ice of' dcvclop111!:, .' II
r (]'](IOllS' lefoultcd ,11 the last one- , hllll( IC:(
Default has hardly [iccn the p1 ov11 , and Spam . 'ivc ,1 (
1
1 1
dcl:.1ult waves. Figure (1 shows the percentage of' nations in sovereign default each year frotll 1
,
hancc, Germany, , p(iland, Russic1,
Jap,m, 1

)
 - - - ~ ~ ~ ~ ' ' ' ' " ' ' i \ ~ ' ,,.,,
:. , . , . , . , . ,,,. _
.. ,.,,,,,,:,, ,s.,,,,,,, .
. '?J:I:.Zi, -~~-- --.,._ --.___ . ~
_,,,.-,.,

xxvi Tl1e f:'conomics of'Soiereign lJeht I . 1 o{Smac1g11 X.\Tii

!he 1:co1101111c .
- _ _ _ _ _ _ _ _ _ _ __;"':'~c':'-~:~'5:2"':c"/!"_~J)~c~h~t~f------------

yems. Q"ile a Jew ,niddle-iocrnne

I
'"""'"'
rnvc, e m, Ice as we . " " -
I t I I
. rocusin
11 I tl 'ir 009 book, C.i rmen g
Part Ill
Crises ol the
J980s 111d i 9 9 os It
, 1 S Jvercign Del au
Reioha,i aod Kem,cth Rogol! so,veye, l ;e ,ccon n cc m, ov" q,,, c, 1 , . couotn7
" I I I 1 J ,1 It 't, 1 l(rng pcnm1 s
Part IV The Risks amI c (ists
o ,l ~

"" Iy o" defa,d ls oo e>tenrn I deht d,,,.,,,g ll,e last 01,c.1,,,,,,h,d yearn, o smn pie O' . "'" ,o
75 Ill
yields 19 '"""'" thm """ dcib,dtcd, h,,t 56 '""""'" I wt , ". '"' Y, , ccede
waves, and at least 011 four lllaJor occasions t 1c percentage. I o na
1 I"(, C'I Ill cI , dclaults o
tons d Volume rFoig11 A ''d '.'lll(.l S' lwcrc1gn . [) cl1 t Relief .
40 percent.
, . . I I' t . . le'f~wlt has ex
lPart I The Conundrum
-. o .
, Sovereign Debt Crisis . .
., of the n I dustrializcd Nations
',11t II
The b1rozone, . . nd the h1ture . I ... I Issues
. I St1t''S
TI U 11tec ' ~, 1 oday cl SocH
. ii 111d
' l:t 11cc1 , .
Beyond War, Development, and Default Pmt Ill " ' ,; I u,mtcmpomy . , l pm1<11cs fr11m
Pact IV Sovm,gll ' ' ... I hill tltc,c '"' "'"" ''. le, of this
Within each . Jeri no is generally cI 11,on0Iog1cc1
the material ' rcqu11..cs.
, . The n:m<11n(
1 lmvc chomctcn,cc 0 part, the o1c . ""'1 development ol . t rn
I I I,c rn Ien f' soec,c,g" ,Jc bI m wm,, Ieve Iopmc,, t , ,1 ' 1cl clef'llllt
as .. c,ole '"
tIJI'~,~ chronolo y w I1cn l l1c I001c,1
"' . , J each ai t1cle Ill u .
g,,,,, themes of vnecccig" dcht. I lowceec, voeeceig" debt hos pbycd st,ch '''"""' "th d decP . ':' discusses
1ntroduct1on . , . , each pa, t <1rn
,1,,,pi"g the""".'""'' ""d itntit,,lio,"'I dceelop,ne,,i n/'tl'.wmld lhot itv tetU~clcs O 1
:;'','i'"ycd o
;,,to the cc,d y loslocy o I cco,,o,n" dceelnp,,,ent h, "dd ,1, o", soee,c, gn de ht h' . Foe
. , Icec I01n."g l Ile """'P' '"' I '""1"P"Ht
vi g" ir, cm,i , olc "' . 01 .1, e. ,o<j
. gv o 1 po 1,t,co I o,w1111zat1on.
o' Volume I
"'""Pie, soec,cign debt hos ph,ycd" sigoiCtcm,t rnle i" the fonootioo of the modern.''\, f
nn,ch scholmvh,p . lrns l"'" <IC,otecI lo l Ile cc I,,1,0,,, I np ltclwce,, l I,c po 11 , ,co b' _ . ,o,iog
I <irw1nizatt I)
thcs1,11"'"1 its,bil it y lo ou,oc1 '"'""'I I
l\,,nliog, os wel os to th, st"te s bkcli hood ";'~ 0
ith !'art I T/1(' Theor)' of. m
'\'
c' ,~
"'Ci"l1 l ,f11
I,[ t do citizens pc1 eel\1c
.. , ,a111nc1c,. , . "lSC
'nlal debt inleaves
their
it., debt. As '"tolhc, e>mnpl,, the ""''"ooe '"l'<cd itv own soec,eigo debt ccis,s "'O 1 , othcC . ucscei, , 100 vc1nmc . ,,
G,cccc 's de l\u, It Il conti" ocs lo stn,gglc in 2016 "'"' !\,,thee de foo llv by G <cecc o, 20 ''.H"\cc"'
0
Wh,,, the mtrnlI goec, f
, . cnt or a society ,ss. . 1hat an increase " "', A rtcr al L the issuance
mn . . me might tlrntk ... "w,ts '""'"'"d . ,. scnicc ""''
vtotcs in the I''"'""'" co,,ld b"nliy coo"! '" " '""j o, so,p,isc. A Iso "" !ho ccnncmpm.'n Y , ,xl"Y .. t unlysts, l
net wealth'? Jn tic 01lls , , 11111111 bclorc tic
. I , debt 1ssL
, 1uturc strc.im
, ol taxes
1 I 1iro1ccts
10
. ,
wit l d
stn,gglcv .'" L"'"' . A"""'." . cnm,,,o,.
. !\ ,gco1m,, . <cl"'' . 2(l (l I om I ,,mmov
I , Ile,I m . m . clchult'., dcfoolt .
a society no hctte, . . wm. sc o '
,. ,,icnl must lllll . ,osc 1
. '(l li.lr gcnu11ic) I , ""
, til'ino ol usclu.
"""i"""
f

0 1
It to vtrnggle Wllh ,1, holdout cccchto,,, ""d leg,,; deeclopmeots ,d,ucd lo tb, or debt implies that tl ic, "', O()VCIIs11 nised by cl e).' l t 'll'C use c or debt a111 / tl ic, Un(1-Cl 11cnt , ' c,
Bonds Net
""'"""' to ,w,,n", lbc ''""' ''"'"""'" or '""ccign debt e1,,n .
extinguish . the cc J 1 lfthclom.'
I'll 11 .0 l , mssiblc for . t( ic'""'"'" l t Birro, ... Ill
,' c'""'""' , iublic pcrcc1n:s ..
These '""" ",n! ,mmy oth "' weave lo golhc, to hmo o cn,n pi tColcd l"pc.,t,y . . t wrht JC I I , Ro 1c1 ' . 1 1 how t le I ,
. . f'. )Vet o ,
".
lngh rate ol return, . . 'sent va uc. , . ''XJJlic1tly on. l ... '(I is one o
dcht M,my lhccods of the vto,y oecdop, """ !cw ivs,,cs c,m ho l\,lly Ol!dc,stood O wtl!t des ,c c net pie. l) focuses~- .. , 'l(k1 1cssc
Projects to have a pos1 ,v I Chapter , Ll, "!USC the issue ' . I , idysis. Barro1
con, 1nchc,ts i,m Of !he foll W<llp '"' We l\ 0 f soecc,ig,, dcht Howm,, I he licvc Ih,t the ".';, 001
0
Wealth'?" Barro ( 19 74' Volume .0 ' I 'bt borrcrn111 1g cc, , r straight . - 'mc1a ,"' , , Summing .
tint COl!tp,isc 71,, lo',,,,,,,,,,,,, of S,n,ae;,,, Dcht odd,css "" of them ood prne< - 'rc1n le I, n one O 1111I lr ncg.1l1\c.
the wealth effect oll1 sovc_ , dirticult t lcl itivc, ncutra 'c 1l'l'cct seems,
comprehensive .
LIil(Icrstanc1111g o 1 sovcrc1g11
.
cIe b tan(l its

importance to t I1c wor I(I c'CO!lOillY pcrccJJtions, the pro J,c, n ,s mo1c itc cl .. lcct cl, nild be pos , it ror a nq,,.1 , ,. tivc wca t 1 c
11 O 11
11

ult11natcly concludes tI ' 11lw. !3irro ""'
says "TI 1mg'""" .,tivc cl tcct
. .. ( p. .I! I(,) ) l t" Btrro ( 197),
The Organization or the Text up the entirety ol , l11s an.1 lysts .. , ti1" ' 1rourncnt ro r '1 .post'1cm or the I' u[1 JIC . Cl "lilh' and on l jic
. . og "' 1
a priori, to be asI conv1nc1I .. ,11 c"On , c
the Il cc t mmw 1 j ,bt issuance on JlL ,hhcwc, .. I 'conomist Davit .l
, mdys1s 11,ct o cc tl , Bnlls 1 e ,.
into twelve parts.ll"'t co,op,isc the co,, '""hihot io" oft hc.sc !Ince eol '""" hm '""' mgmn Barro cxtcm s tic ' ' . , or the c c t is for as le ,, l{icmlo argues
The I 05 m1 iclcs Z) The issue I al leas ' 1dc11cc, '
zed Volume I, Chapter . I ffccts oocs bac' .. "Ricardian ClJLII\, , l bv a subsequent
public's pcrccpllon . 1 wcdt, ' c1 .. become o IdHiwn .c1s. rncc ol . tIc lit ."dccmcc .... ,
,J,itionsl11p . arn l
Volume I . '''1) I 1 what ,c1s . the ,ssu, J,. 1t nd tins ,c' . ,,
Ricardo ( 1772 0 I !L .. I I . iuoh taxes o1 . licitly unc c1s ,I . , . debt to linancc
Part I . 1cnt l 11 l1:urthcr, 'ns ,mp
The Theory or Sovereign Debt that l't1ndin1r the gove111n c-
c1llzc . I the "ovcrnmc'11[ ISSLICS :. ,,fr1tc taxat1011. .
Part II 1dc11t. . , I w, 1en . , olI I1111111c ' when l lL,
Sovereign Debt hcf'orc the Modern State Strcalll of taxes arc cqun, "Ith has increase(. 'JS or the bLIIl Cll
1 11usio11"
Part 11 I
Political Institutions and Sovereign Debt suffer no illus1011 t j1at tJ ic'tr Wed ., ly rclicvrng . r cttIZCI , l not have a "\\'C'l' t l I ,. . consumptwn. .
1
~
Part IV
Sovereign Debt: The Long View the government, there )Y. I tempo,,,,, vdcncc, consL . """" o In""'""'
I they do note ' c, 1t1XL'S that hast Ile,
!\s a result, under R1cai(
l1111 cqu, ' ns am
l l1 t 1 , . or its opcrnllo . '11 J1tcr extract as I ' . t11Tcnt taxes.
t c1111 '
1
Volume II f'1nnclllg , Jl WI ' ( lll IOI C ..
Part I guvcrnmcnt uses cc ' tlic oovcrnmct . . is . subst1tu tl .. t Jl'll)Cr bv Ba110
. 1, 'S that "' . t ISSUCS, - '1 l the II s '
Part I I The "Long" Nineteenth Century Instead, the public rca tzc.. l tl1c Ooovcrnmen . . lly considcrcc Ill . t l" in Jl)7.4, Barro
sa,nc
. 1ircsc11t value, dS , . the de it .. s,t1on . . \vds
.. . actuc1 ,, I). I lo,, .c,,er,"''11 11 c
The Twentieth Century in Perspective This Ric,mlian cqu,v,1 . , J,enc-c p1opo. 74 Volume, I' Chap 1er
collcctccl Ill . this
vo 1u111c, , Barro ( 19 '
 xxix

, . l 0 f debt collection. In The Pure

appart:nlly was not aware of Ricardo s views, which he acknowledges with a footnote in "On governments could 110 longer rely on such im:llioc 5 . ChaiJter 5). Eaton, Gersovitz,
the Determination or the Public Debt." "I am grateful to Buchanan ( J976) for pointing out that Country Rtsk' . , l St' l'tz ( 198(l Vo 1ume 1' . .
Eaton, Gcrsov1tz, mH ig 1 ' . . , 1- n in the absence of dtrectly
' J nofsove1e1g11 1cmtn"'
j, 1111111
l was discussing this topic." 2'1 In "On the Determination of the Public Debt," Barro undertakes dl1( St1ghtz explore the theorcltcal unc cip 1<:,s . r the extant literature on
, ' , . .. 11 , tl s survey muc11 o ..
a direct examination of the implications of Ricardian equivalence. After all, if debt and taxes coercive eniorcement mechamsms. 1c au 10 '- .1 tl1 , l DC debt cnsts that was
. . . . t J, the context o c
arc equivalent, how arc we to understand the behavior of governments in issuing debt? Barro sovereign lendmo, and approach the p10, em m_ . . . uestions of whether lenders
poses the question as: "In any event, proponents of the Ricardian view that the cl~oicc between , I .
cvo vmg at the time they wrote. entr<1
" c , I to their analysis . .
ate q
'riod JJrcccdinn their analysis
. .
I r tl1' lendtnt:: 111 t 11e pc
debt and laxes does not matter me left with an embarrassing absence or a theory or public debt '
extended too much debt. Further, mue 1
.
e .~ i
r . merc1al 1an1<s, so '

C
the 'Jt1thors consider whether

.
creation" (pp. 940-941 ). Barro develops a theory""''""""' lo explain the debt issuance behavior was conductt:d by consortia or syndicates O co111 . t' t )O rnuch or too little credit.
or governments under Ricardian equivalence and tests his theory using data on debt rcatures of. banking regulatton . m1g 1.it 1cat .. 1 to the extension o l
. . I lJt--a 11 roccss 111 which the
. .

by the United States arter World War I into the 1970s. r:tnally, they also address ~ . f' ! , eschcdulmg .O 1 .t C,iount ol'J)aym..:nt
the question o t 1e r
.
1s reduced
. 11 1 ihe ncar-tc1111 '1 1
Martin Feldstein continues the exploration or issues surrounding Ricardian equivalence in no1111nal amount of the debt is left unchanget JU . redrn;tion in the net present
d , . , J , 1 1st alwavs unp 1yrng'1
"Debt and Taxes in the Theory or Public Finance" Feldstein (1985, Volume I, Chapter 3). He <1n tne penod oi . payment 1s .
!engthencc, a mt . '
begins by noting that nineteenth-century economists advocated balanced budl.!ets as a matter vil' ue o I' payments cornparecI lo II1e 011'gi1nl ' promise.
(i) "Sovereign Debt as a c on 1111gen , t
( ,,rossnrnn and Van . y I e I Chapter l , ,t
or virtue and prudence, but the exploration of this issue 011 economic u,rounds has received Huyck (1988, o um ' . ,, t,. three features ol sovereign de 1 1
. .

little attention. One argument_ for the USC or debt to finance extraordinm; expenditures is the J .
C aim: Excusable Defirnlt Repudiation, anc . l Rc11ut1t10n no cs . I
' . , . . dcfiults are usually partia
. I b I cconorntc pet JO(1s. ' . . . :l
'.dea that such surges 111 spend mg might be better financed by an extended period of a small taX l11arkets: defaults typically occur 1l1 cleat Y dC . after defaults. rh1s thm
rd. t I,er than total, and sovereigns . . , , bi , tO borrow agaltl ~001 1 . . .
mcrcase rather than a contemporaneous massive tax levy. Feldstein essentially accepts an; a e . . , I., contrast with the assurnpuons
R1cardrnn equivalence, although he never mentions Ricardo. He concludes that the choice . I" , . --11rov1des d c edr I V
con( 1t1on---tlnt del"Lillers can borrow ag,un ) (/ ,y 1'(1r Grossnrnn am .in
, . ' " 1 I Chapter 4 "~ .
between debt and tax~s to finance a temporary increase in spending is really an empirical one. governmg Eaton and Gcrsovitz (1981, \ohunc ' . . , t' . so they arc contmgent on
II , . . l I , onom1c s1tuc1 tons, . - - ,
W1th1n the con\cxt ol th~ thco~etieal model he develops, Feldstein argues that. in general, a uyck 1s that defaults occur 111 clearly kit ec , .. r tTrcntiatc between delaulls tlut
coneu:'.ent tax mcreasc 1s prcl~rabk to the issuance of debt that must be paid over the long e. . I I101s argue lcndtt s c I e . ,] l
, conon11c conditions, . Therefore. t 1c. .aut '
l tint ' are somewI hl, t c,xcustblc .'
and an outng 1
term. r hus, the issues surround mg Ricardi an equivalence remain somewhat unresolved. arc due largely to economic cond1t1ons, anc ' .
i\ncnduri1,1g, mystery th_c~t plagues the understanding ol'sovercign debt is a staggeringly basic repudiation, which would be completely inex~usahl_c. -!u ck. Borrowers anxiously maintain
question: :(J1vcn the d_tffieully or impossibility of lenders enforcing rcpavmcnt, why do '
!),eputat1on ' plws 1 key ro Ic 1or ('11'()''Sl11'111 " ' ,ind V,ll1 l y comht10ns .' pcrm1't , ,111tl "\"'n ~'y

sovereigns ever pay thc:r debts?'' Rcllection 011 this question immediately bri;igs to the fore a 1l,cir , . ,-, '
reputations is nood pwers bv dlv,ays p.iy g
, . . , in' whct1 eco1101111c
.
. .
. l1 I'1witions Smd anothct V.d), tic
, . ,. , I ,
, , ' .;:, '- - . I 1art ol t1icir O c' : . , ,
correlative questmn: "! I lenders cannot enforce their contracts against sovereigns, why would \>.-hen they must deFwlt by detaultmg on on Y 1 l .. ' 'XP 'ctit1ons for repayment_ b;
1 . ,. . ' : , . t O meet the !cm CIS c, c; ' . .
" . .\end' " .Yet the S(ivcrc1g1, (lebt m.ir
lenders. ever -.. ket is enormous 111 stze
and has
- endure(I ('01 sovc1e1gn borrower assiduously attempts , , ossiblc even when lull p,iymenl
h .is P
centuries. r h'.s s_ccn~rng paradox is perhaps the central question of the theory or sovereign debt P'Y 1 1
ng tul\y ,
whenever possible
amI p,1yin"c as muc . , . ol'borro1vers, IcmIc1s
1 p,11 1
, exc use
and one that 1s lar lrom a complete resolution. l . l bchuv1oron tie . . 1I ,.
)ecornes impossible. Correlative to this gooc . . ., i borrower;; who mamtnrn icn
d t . . , , . 1 w1l1111g- to. 1c;m.1,1c'l
A kcv, attempt
. to explain
. 1c,-= ci 1 so,e1e1gn
the cx1stc1- . ". d c)tmar
l kctsandtoresolvcth1sappa1c
11! e ,iu\ts that cannot be avoided and 1em.iii
paradox. 1s the re1Jutal101ni 11Jp1wicl . . . J ' 1. t i 'S arc 1111pc1 1ec . ('I t .
' ' ' l-:-iovci eigns pay their debts tn order to rnamlalll t 1c;1
1 good reputations even if their payment us 01 c. R<woff(l989, Volume I, iap c,
I 11 ",Sovereign 'Debt: Is to Forgive . 1:: . , ,rr' Bulow l\lH1 ,., l , , .. I
:.eputattons as good borrowers and !o maintain lenders' willingness to extend further Joans. ln to oigc . "W' show that, under !a11 Y genet,I
7) . I idlssavmg, e, . '\llt
Debt wi'.h Potential Repudiation: Theoretical and Empirical Analysis" Eaton and GcrsovitZ , Bulow and Rogoff attack reputauona me IC ' ~ 1 b . the direct sanctions avai 11 c 0
(1981, , Volume I ' Cha1Her 4) , 1on.i, tl1<1n Eaton and Mark Cicrsovttz . develop a tor!11,
-1! C( 1
lilt tt1ons, lending to small countries nll
1st be suppoitcc Y
ition for repayment "' ( 41) In 1
P- '
. ,_, .,
reputat1onal model ol the ~ov, -, \ l k , c1 ec tttors, and cannot be supporle d l1Y, ", country s I eput, , , . I , one ncgalivc conscq , 1Jc11ce
, . , CJ cign ( c ll mar et. In their model, they assume that a countt)'
that defaults on its sovereinn ,1,11 . 11, . , , . . , b irrowcr 1'ict:s on ) . .1 , ... , 1
1::, "e 1 su ers permanent exclusion from the debt market. w 'fl Purely rcJJUl'1t1mnl model a dclau!tmg l
,., . ' ' . , I Rooo s1iow ' '
fi' tl,11 1 borrowe1 m, ) ,ll Jiv'-' lll '
. . '~ I
borrower 1s assumed to dcfo It . exclusion from further borrowrng. Bulow .im . "" . l the savmgs trom dci.iu t to
. . . . u opp011un1st1cally, but the model also assumes that the desire 10
borrow 1s mfm1tcly lon"-livcd S tl ., f' t 1 l state ot nature in which he or she can gam b)' dcfaultrng . , _ re niav arise a s1tuat1on 111 \\,1 iic
am I1 1't
, , c:, , o Jc nst l c au !, aecordmg to the model, bars the
I11 other woi us, 11 le
L'.aton an{1c,ersovllz then derive a model in wl11ch lt1"
debtor f\ , , trc
.!rom markets, .Jorever th,ere.i .. 11c1.
,. " 1..
. nance a stream of foturc consumpt1011. .. \J{)tnnvin". Because "on O\\cl s'
sovereign has a credit ceil' , b ' ' 1 I'S 'lllV 1110! C b l j' I '
,. : . 1
mg d ove w 11ch ll cannot borrow, a limit that lenders set based 011 is Profitable to dcf'ault even if doing so prcc u.c e. ' ' . , . , thc)1 will do better by l C au trng
thcnperccptmnoltheborrow' ., . . .111 eslateso 111.1 1Uic; . .,. . 1111101 l , ,1
. e1 s (1, 1sull11ty o l'lJemg excluded lrom , ,.
further borrowing."~ Ptesumcd to act 011110rtun1sttcallv. and soni . . . ivcrc1on born1\\ t:t u l,\Vc '
r I ., . . I ,. re1rntat1on, ,1 s, I- 't I' I '
Accord. mg .lo po11tdar JJercci t ( , l . .. I - ,s <lt ler than by paying and ma111tam1ng l 1_c 11
t:- .
1 1 111 , . . . . . , of"thc sovereign debt mat ,t: ,u 0\\
. , ,Ill( cons1s 1cnt wit 1 a Jew exemplary c11isodes there w,i.
once a t1111e 111 which r' ,11 , . . ! reputation for re1)aymcnt that would sustnin the ex1s'.c~cct ins it can impose when a borrower
.,., tc countr tes routinely made loans to poor countries and enrorccl
1e1><1ymc11t throueh the exercis, r ,
c O gun \10.i t t 11p Jomt1ey
1 I I t I 'JVC smm: s,mc.: tl I I 1 It'
. . ~
,
or even direct ..
m1lttary power. By tIJt:' ell( {ogoff maintain that the lender mus 1' , , ,, I iroccdures to pun is 1 <e au ci s rn
mid-twentieth century that time had passed. ir it ever really existed, and lenders to dct~ I . I1t l , 1ble to use 1eg.i I
<ill ts. For example, lenders m1g Jc '
 -
.rxx .rxri
The f:'rn110111ics of'So1ereig11 !Jcht I
.
The /:'co1101111c.1 o , mu
1 S' . ' ei<>11 !)chi I
.~ . . I ,
. , . Ins been the motivation of tic
they might be able to interfere with the delaulter's trade through litigation or some ot Iicr 1i1e1ns._' . " th he focus or 111any studies '. . is or default. a lapse that
In short, rcpulat1on Medieval State." Veitch notes at t l tl 1C' imitivations of the victl~l _. s lend to the state.
not enoug I1 to exp I a111
1s tI1c existence
o 1 sovereign
ccl t1t rnai,
Jets 1cco
' 1c1111 0 . I1 l , 1unorcc O . of pc1 son.
to Bulow and Rogoff. _ ne sovereign,
I but most rcsearc ldS l l 'lllY person or gi oup . . , , . the situation, the
1
1c ai111s - to address. In par t1cu I r why wou l 1 t c. 'wis so poor.,1 A.s Veitch. sees . i 'sl)cntc game of.
In";\ Constant Rccontracting Model or Sovereign Debt" Bulow and Rogoff (1989, Vo 10 ' e I t, as a cc) 01 ' . rnet11nes c e. , '
when the bchavior ol t 1c Sla e ' l __ ire involved 111 a so. . , ciun rci udiating
I, Chapter 8, t_hc authors co1~t111ue . . attack on pure rc'.1utat1011
thcu: . models_ and recm_1~ . I,'..i\~e
1ze t 1
by I 1 , t'al 1 lcncc1s,
II b,,iks down and rcsu lt'mthesovc1
1
borrowing sovereign am po en _' s to
, 'Jlhnation 1 of' the
importance ol sanctions. II a sovereign borrower dclaults, the creditor can 1et,il 1 . t .. rnuttl'II beneht
seeking t I,1,1t occ, "1s1ona Y ie, t Veitch . c1,eve,Jo11s an ex ' . , .
implementing sanctions according to Bulow and Rogoff. For example, the creditor rnig 1\ ' conr1scat111g . 1 hs' propel y. . ..
debts or even cm e . . s md confiscations ai e, likely _ .to - .occu1.c is the slow
impose
costs on tI1c , Ic 1au Iter t1y Iega I mancuvcrs tI1at 1ntcrlcrc wit 11 tJ1e cJe 1au lt'1's
c expoi ' ' j j 'bt rcpuc1ial!Oll. ' f' Wcste1 n 1~LI 1011
c1rcun1stances under wh1c 1, c _1 ,iodcrn history _0 '. ,, crchant class. In
prognirn. For the model, the authors assume that the borrower's discount rate 1s . lug . I1c'r than . .
One or the great themes f the eal Y. I 11(I the concorni 1, 1! r!SC O 1 ,1 111
O .
di . clli" De Long
the WOrJd market rate or !ll[CrCS(, SO the borrower Seeks the maximum Joan, but l l~ Crcd1to ' debt1 . . I -' overe1gn a . , l trial Rcvo 1u11 .
I development of COl1Stra111ts on t le S ,. ('11owth before the lnc_LIS , . 'S cconollllC growth
1111poscs lending l1m1ts. Consider then a circurnstancc 111 which the market value ol the . I , - E . Y"lll C 1ty SI ,,Jer cx<1m11H.:. ..
Princes and Merchants: LIIOJ "' P) De Long am1 11c . , D, Lono and Shlc!lcr
l11lls below the f'acc value, which could be due to an increase in interest rates or problems wit'.
and Shlcifer ( 1993, Volume I, Chapter - , JJeriod I 050- I ~OO. ~Ill 1c \ imi:irtant themes
the debtor's production or exportable products, t'or example. Bulow and Rogoff argue that \ 1: . . , , . . ,11 t overt11c , . , ol the 1110s .
debtor and creditor will renegotiate, because both parties can be better off than they wo_uld \ under various forms of govcirnnc , t'clc introduces one . of'the sovereign
j' ctJy l11e di I . the be JaVIO 1 .
.111 an outng. I1t rcpuc 11at1011.
. 11 1e cIcotor 1 its
trnc Ic. while do not address sovereign debt c lie . . tion: restramts on . 1. , t the state's ability
nation can avo1c 111tcrlerencc with . th. s l bt markets 1unc
i.
I , . wth 1s v1td 1 O .
. can avmc
crcc 1tor i tI1c cost o I"1mpos111g sanctions.
F-urt I1cr, other parties,
such as cco1101.111c . unit., t 111 understanding how these c e ' 1.uncIs 'md econonuc gio ,:'f'I , iisc or an absolutist
Prornote lenders will111gness to dC . . , lvance , id Shlcdc1 cone
. - . , -Jude. 1c
. . 'Clive that values ,.
. tI1c c1-cc11tor 11at1011,
111 . may su f'J'er 1
I t I1ere 1s
a trade reduction. This opens the poss101 ,. l1ty tl1'1,r
to borrow and repay .its debts.. A.5 De Long . ,u ,
ly authority . me, ., J'rom a pc1spc
the creditor nation's taxpayers may bail out the lender to some extent. Finally, both the borrowe
government and the esta t1I 1s . Iime, 11 t of pnnce , d wt cclcbratecI" (11 700). . v an all-power 1u I
and the lender anticipate 1!0111 the outset that there might be a sequence or renegotiations, . l1 , 1110 urned <1n 1 . , t1011 o 1 m
1,- iut such a crcd1b
1 . c,

consistent wit I1 I',u Iow ancI f>,ogo 11 s v1s1011
o 1 sovereign debt as involving a process o J'" constnnt cconon11c growth, events to e . . T!l debt 1s the qucs
rcco11tracting." One or the central pro ems c .
t1I . 11 sovc1eif,
, will repay a o, I 111 an( .1 . r Sovereign De I t
\~ 111 H . 1
- 1 1-01111 sc thdt 11 "The 1 hcoiy 1
Harold Cole and l'atrick Kehoe seek to counter the Bulow-Ro<>ofT attack on rcputational sovereign can make a crcd1b c P , . . would lend. 111 , . Conklin addresses,
O ,

models in "'Models or Sovereign Debt: l'artial versus General Reputations"

c, Cole and C Keho co111111itment to repay, it. seems. no sme ' pe1
98 son Volume I, Chap t er 13) . . James . . r Philip II of . Spam , .
"C klin(l9 , . ,-ngbchav1mo .. .
( 1998, Volume I, Chapter 9). They consider a more general approach to relationships. <1nd
I Spam under Philip II on . _, ode: the bono\\l . l lrrowcr rclatwns up
, question by focus111g . on a p,11 , ticulai epis .1 .
emphasizing that a breach of' trust in one area can affect trust relationships in other dornains. t 11s . !-le analyzcs tl ic, Jene1c1... -- H 1J'ormity to various

!-'cir example. a default 011 sovereign debt might make suppliers or foreign direct investment_

bin the second half of' the sixteen
- , th centu1 I t Ylies the histonca I Iecord IOI cOI wich of' Bulow an< I
I PI 'lip am s uc . for
( FD!) to a defaulting country suspect that the government might not ho nor its o be; Ictween Gcnocsc bankers anc 11 _ . I , (' nds conhnnatIOn . , , I I , to ' impose sul ,.llc1cn
the appi
, I11 ,1rt1culai. lC 1 , , . , wc1 e d 1c 1
commitments, such as not to defraud investors by extortionate taxation or changing capita
t
t lconcs ol sovereign dcot. .
p, ri , t is the Genocsc . . , d finally pay up. c''
control rules. Thus. in the Colc-1<.ehoc model, this more generalized approach to truSl Rogoff ( 1989, Volume I, Chap , t e'r 7) .. I "him ld
to change Ius .. bchav1rn . I , ,1most 11 instructive . am I
.sanctions . . . f)j 11Tp 1 to me uce . 1,. inc of tic
relationships shows that sovereign lending can make conceptual sense. . on the dcfault111g ntury prov1c cs t . . , modern state. I'>c,J Hl 11c
. . . I1 , sixteen! 11 cc 1 , nllon o 1 tic . . I
In "Sovereign Debt as lntcrtcmporal Barter" Kietzer anct Wright (2000, Volume I, Chapte I he Spanish Empire of t c _ . . 1,bt and the 0 ' . ,, 1 Central ;\mcnca, dill
111
.
Poignant . . O Jsove1c1gn,c
episodes in the lustoiy _ . . 1, .. stretches oft ic ' 'j,(_'mbbc,111, I I inundates the co 1r, ci s
Ill). Kietzer and Wright adopt and extend the vision ot'sovcreign debt as a process ol'"conSlalll I
t le colossus: Spain holds sway ov . erl11111tcss. . r ilver from tic. I ,ncwwrn , c th the reach. powci, ,.
recontrncting." They point out that, as an empirical matter, sovereign lenders have long cn_i:iyed . . , s1ve tlow o s . ! l compete w1 . ,.
reasonable profits despite numerous defaults and that creditors who have suffered defaults South America. Before long, a m<1s_ N other nallon cou c . . , -xtccnth century. Sp,llll
1 o in the scconc 11 hdi oft 1Jc. .SL s empire de 1au.It,etI
of. Castile "iving the state unto 1cl 1chcs: Y'l
continue lo lend to defaulters in many instances. l<.lctzcr and Wright present a model in which
anc1
b authority o ~
ot'the Ilabsburg- Iccl cm , 11irc N.
e.
J',wer than lour . . cs Phi 1ip 11 .
tirn ' _ , - or Castile .s I..isca I
there is 110 exogenous enforcement of contracts. Instead, the original contract creates a surplus
ccan1c 1 chronic sovereign (e ,ll 1,1; !lter o e - Philip 11: ;\ R e,const1uc 11011 14) l)rcl1clrnrnn . , I
~ would not have been 1cm1111 "'"
tlrnt can be shared between borrower and lender- - otherwise there dill
. ' . . , l l, Debts o 1 , I Chapte, . ,
in the first place. In their model, over time, a process or intcrtcmporal barter determines hoW on Its debts In "The Susta111c11 e I (201() Volumr , . 1, t sustamablc.
the borrower and lender share this surplus. . . , ,Ill , d Vot 1 ' .. ,[ . were. 111 ,Jc . get t le,
Pos1tion, 1566-159()" DrehchnMII , . , ic that then de 1ts . , I I-low did Spam
''voth examine the finances o f' (',as tile and 1
.. , ,. 1, they were no . . lxicfspan of a,1ust.<1 r,w
,ugt t susuuncl. . . c
!'or/ II So\'ffcig11 Uch1 hc/i1re 1/1c Moc/cm S!o/c -.E:vcnit'Phili11!I'sdcbtswcics . , ustun,w
' c.
"(() 1575.anc l J 'i96--1n d
, tooctthccrnncc tt1 I - ,
~
11
opportunity
j to defoult t'our t11ncs--:- 1557L r''I 1i11 was able to 10 . , iattcrs from the !enc1--
\1-rowa!!,llll"" c1~-
In medieval times, loans were ollcn made directly to kings. Loan repudiations. def'aults. a lecades? In spite or an m1tia cc, . 111I 11'111 and Votll c.'
. . . I I ,f-iult ,x1rn111c . nIt 111 the /\u.c of , I'! 11Tip 11
nd ~
direct confiscations or property were common. Veitch ( 1986, Volume I, Chapter 11) explores dcfoult, and he did it over and ovc1.. [)re. 1c f' 11m ' !lei!: Debt alllI .l)cf-lu '. they address one tIJC
Perspective in "Lending tot Iic Bcirrowe1 iChapter o - I11 domg so.
I:,). 01
the nature or sovereign dcf'aults (and worse) in '"Repudiations and Confiscations by lbe I
Drclichman and Voth (2011, Volume '
xxxii x.r.riii
lill! Eco110111ics of'Sover<'ig11 Deht I . 1 S' ivercif!,11
I .I
The Eco1101111c.1 o . r .
/)e/Ji I
.

. l ing extingu1she( on y
. p,oblems ol'.so"rn,gn
endo,wg . debt How can delm,ltcrn
' . nccess to new debt"
rngan, ' l "<'Ct Jers
t!JC .
group die, the survivors . , to receive payments,. with the tontme Jc
conli~rne ~

chance to default again? ls it a matter of lenders never learning, or could it be that cagy Jene ge when the last annuitant dies.' 1
somehow control or manipulate
. their
. 111uch more powerful sovereign borrowers an d mana
to npcrntc prnlitably in spite orthe challenges'' , II" in . . I Sm'<'l'<'ign [)('/Jt ,
Purt /ff /'o/iticol /11s/1/11/1o11.i one . ., Thus the sovereign
D,debmm, nod Voth """" "" the pofi ta hil it y o I' "I coiling to the ho.TO we, I mm he . in,
thci, a,tide, 'Sc,ial DeiOult.s, Sc,ial Pmfit" Ret,m,s to Sove,eign Lending io Hohsbu,~ S~\ 0 I e1tcr power ll ,ir crcd1to1 s. -' . . .
n .its lace,
, . . pos.scss muc . 1 g1, , imitment ,, than ie
to p,i. y ',15 promise
. , -d nther
. , , imitment ' than usmg
came, eve , I1rs
bI S66-
I I 600" ID,diehmao nod Voth (20 II, Vniu me 1, ChaJ>te, 16). They cond ude tlwt Ph "cc sovereigns
I. I Il l!T"d
an ,ers mace out quite. we II111 spite
of , l I1e dra111a of' four defaults. They also argue, tint
' ,o i" has the problem or ma rnig a "credible con
1 , iockrn state c1eve rsonw101, c 1
t 11s ccm 'lJ)JlCned to rule. Nor tl
I. . 1r
. . ol, cIe f'au Ils amI restarts was that it provided Philip with a means o f' educII "
1ntcrprctat1on greater power lo rcpuc talc (lbtAst1cn
c .. tl r than o a pc 1. 1 , t The Evolution
1 . nd more to be a promise ol tic gov . - I , ' crnmen(, Id ic
. "Constituttons ,lilt . . , l Comm1tmen .
I I" North and Wcmg,is . . t
payments in lean times and making large payments when times were better.
~
,

I The flow of silver fi-om the new world to Spain was enormous, but it was also episodic aJ\V
.
and Weml!ast explore t 11s P
1
, roblem 111
. . S', -ntecnth- .en L c, t iry l:ng ,111( , . the constitu 10n,ii . -
. ~ . ' t11. Cho1cc 111. eve . , it changes II 1 . 1 t
.raug I1t wit. I1 ns"
. I r1 1c " s11vcr fl eel" typical
Iy anwcd
Spain once a year. l-loweve1,.
m the f ci lnst1lutio11s Governing I LI Ic . , to their argumci ' -t it to credibly commi
1 2 0) J\ecorc1mg t onoer a JI I Y
could he delayed by wcathe,, by oot une<Hnm,,., disaste,v at vcn in which silvc,-1,nleo ''. [.,5 (1989, Volume I, Chapter . , tl , government as, r "' . . th respect to sovcre1g1
structure of government Ill . E-no' ohnd. "''oavc _, le~ . Iits o1 lende1s t WI to tap - huge l111ancic1 - , . 1I
snuk, n,nl by milit,ny action, most enlo,liilly pmvided by English ,ivat,m. J'o, exampl~,nd
. . It 11
. 1clud111g 1 p roperty
lie .
rig
- I d's capac1 I
1544 liHo mcccJnmtmon we,e '' nH,te to Spain from the Now Wodd conyiog gold. sil"'," " lo honunng property ng 1 s, , ls ion tn Lng dll . bed or dcvclopcc ily
y ,
I . I I to an exp 1c. . I tern la11gu1s . I powc 01 r
othc, Now Wodd pmdoets. Thn,, of the foe, l'ouodernd in a violent stonn offth, em,st p,cld debt. They argue tl_1at t 11s c(. L' ., ce's fina11e1a sys . . . ,,. nee in fi11anc1a
01 1 resources rapidly. . On l I1e, con . tmenl, ,i'Idll. . d Wemgds . . t , this c1I11c1c
lsl oml,'fo'Os. Io 1596, tho &m lh/m ""'" down on a ,eof in Bem,oda, sink i og n oa,go. go h; 1
solvec, and Jcwol,y. Not only did Spain s"rr" occosionoJ losses of silvec end gold """.' t ,
01 n1uch more slowly. ln the te 11mg'of. No1t . . I l "struogle
,111
w1l. Il France. , titutional 1n11ovc1 . . (101 i

Amc,icos duo tu "ccidents in 1587, Si, Frnoois Dmko attacked "nd rnptu.cd the S,7n /ob~s redounded to England sac Vdn 't:, ' I . taoe 111 its on"' , I Chapte, "' . 20) the key . . . Ii David , tc1sc1v,1ge
cons . S . ..
, . ' 1989 Volume ' . ' .. . the lllOll,llC . . . . . r
olT the Azores, garnering an enormous bounty of gold, spices, and silk bound from the I <l f hir North and \Vemgast ( ' nts to conSll dll1 . 'S that their strn Y
to Spain. 11 1 I. .. Itip le veto p01 , 'r, . . ,as!, but ai guc. . . I M lcrn0
Was the development o mu 1
North and \ivcmg, , itmcnl 111 Lar Y m
0
lo 'Risk Sh,ni"g with the Mo,mnh, Conti.,g,.,t Dobt and Excos.,ble lktaolts in the M' 0d rcco"nizcs the sem111a . I ac IlIC . vcmenl . . o, !etc. In "('., icelib le (_ ommChii ter 21 ), S !,is, . "1v1oe '"''
111ms mcomp
Phil i P 11, 15 56 1598" D,'clioh m,n aml Voth (20 ls, Vol mne I, Chaptcc 17), D,ol iehman '::, constitutional
E development icr ' . .' , I" Stasavage (2
. , ()02 ' Volume . . nicienl for govci, enl_
I , ' 1
. l Rcv1s1tcc either necess,iry 1101 . su if'ler l(i88 (t 1c )C, 1111 1
1 "ff of
Voth show that dcim,lts tended to oec,o n, ,o,ilbbiy bad states or the wodd i" hoe w,th t te :uropc North and Wcmgas _
011 1
hypothesis nfG,ossn,an ond Van '1oyok (1988, Volomo I, Chapte. 6) Jo addition, they ,d asserts that multiple veto P its are , 11 til credibil1ty . \\,L 1 s ich1evec1 '
.' . . . . , to check the powci , . (ii
00 co1111nitment. I-le cxplams . l I, ld t g,overnmen' . ntiry cross-cod . l1t10ns ,11osc
that many n I' the sc,y nu""''" debt oootrnots moutod by Pb iii p o nd his Jc,nJc,s "'er I 1
contingency clauses that changed the payment terms based on external events, etlli t 1c Glorious, . Revolution) lJccd, .. use par tame '
l , ovcrwcenm"'. " . .. ., 1 l'ower 111 lntt.:, 1c1tio11al
lengthening maturities or reducing interest rates. 11 It 'llld
landowners that would olhc,, .WIS . 'C have. 1ce11 ii Foundations . . of 1-I11anc1c1 . . n) Kenneth Sc , I HI /. ' .
t, ,c lnstttulion, Chapte1 -- ' . t" -s ol
Earl I larnilton, in ''Origin and Growth of'thc National Debt in Western Europe" Harniltoll In "The Democratic Advan ,ig 7 ()()1 Volume 1' . l the d1sadvan c1,,,c ..
(I 94 7, Voln me 1, Chap t c, 18), Co 11 owv the i nteovi ve e,pJ neat ion r the span ish Empi,o b;, Competition"
0 Schultz and \ Vem . g1st'.. (-st. ime - ' prominent vie_ws. I a, iou conduct1 or foreign . po Iic'Y .
D,el,cimmn mnl Voth WHh a nn,ch hrnodc, siew ovc, the sweep of Ovoveceign debt in Wester I' "I arry Wcingast begm . 11 Y cris,cussing .. --d to autocic1ci , ., -cs 111 t 1c . . , in :fmcnco. . ,rnc . 1 A 1 "
Europe 110111 the late thirteenth century up through World War I, with a very brief mention c e1nocratic or limited governnicnt comp,11c . , Tocqucv1 11 e ,s. /Ji'IIIOCI..; ml or Nazism. (_' on tnry ' to
1
lthe situation alter World War II. As with Philip II and the Spanish Elll])ire, sovereign debt has Ti1csc criticisms go bac,I to Thucyd1dcs, cc.. Kies' response . , to the Ilisctween dcnwc1c1cic, .. , . s and
,.,.,t,
""' ntt "h
Iy connected w the. demands o I' wa, r, n,oco. 11 am i Ito., li,o nses pdman1 Y on, 1aylor's indictment
I , of, t I1c We.stern dcmoc1,
, 1 id Wemg,is
. . t note . tha t struonlcs "' 2 .. JC
..,1t'ic, JJOWCI s. , icrat1e
They trace the "'Il c111ocntic '
I
Lngland and I-ranee and the reliance or both on sovereign debt in critical situations. Bulb l iesc assessments, Sehu lz. ell . . , . by dc111oc,1 . govc1, .nrnc'nts .arc
. ILI(Ics re I'crences to IJumerous smaller countries that turned lo an expansion in soveic"'
t" .
c1utocrac1es . have ".cncrally 1csu . , . Jted Ill v1ct0IY . , . . 'CS tlwl (1cnH , it rests on the, o lisc . -rvat1011
a so 111c
debt when crises threatened the state. 11 1, 1- illleial rcsouic .
advantage"
I to the"' superior comm, llld o l llll
l ' the point: --o u r 1r<'LII11et
' 2 .... foundations -
for I" 1e11l'
aIilc lo assemble in times o I, CJ.!SL. s As they, l. ncnl prov1<. l,c the po 11t1c,1 1 1nd1 .
The multi-century contest between England and France for mastery in Europe relied on 111
endless streams or money, much of' which was provided by various forms ol' sovereign debt. . . . . ,
t 1,ll the 111st1lut1011s of rep1escn' . , . , l'lt1ve govu ( 001 Volume , , I ( 'hapte,
7
David Weir explores this territory for the eighteenth century in "Tontines, Public Finance, at1
d Power."
W ( p. 5 ). O r Schultz ancI WeinoaS . .., . t Jlllsition
- ' ' that is ce1, t1inly
' ..
not
Revolution in FraIJce and England, I (188 -1789" Weir ( 1989, Volume I, Chapter 19). Prior to . the pro-democ,acy
22) hllc , . , a rgument
e ,1, 'l it 1s a p1C
in the Vvcs, iuntries
. !-laved , . t>.:rnocral1c
.
~ tot iosnecs m
1
England's Glorious Revolution in I(188, France was better positioned to raise funds for w~r. .
b n11ght , . tl1<Hight
be a comfort111g . lus
. ..,lltic le "'Do S l vereil.!11. ..
Bo11ow in!.!" Smeg I
~ 1 c

I lowcver, EnglaIJd implemented a "financial revolution" that has been credited generally wi!ll 0
!\cyond challc1111c, as Sebastian Suegh' evi
lt.litcral Agencic.' 'S '. 1mI - 0irnti"e claim l Y nrsll'll1ne
' ' C: c

1 1 11
evcIJtually giving England the upper fiIJancial hand in its enduring contest with Prance.w A 0
. dvantaoc"I Political lnstttu
t'IOI JS , tv LI I t' L1ts the democ1, , .. ![IC. a<\' '' and that tJ1c1c.
1 111es , , seems.
Weir explains, tontincs arc life annuities purchased by a group of people. As members of!lie
5
(20os, Volume
I, Chapter 23). s a1cg., , ,h re l'ten
J than authont,11 . -rin
' reg1
, .
CVtdcncc that democrac1cs . <1,1ullm01eo
ed
 , 1(,;.~1.'s,',.i',(,''f,,,:.'.,?'%'!'i .
:i},> ',,~l~()<'.'F<",;;~;:,:,t',r''.t~p.'W'"',"1f-l..'fl-"''\~l.'!l~~'f"~;~~.l",;~,~~. ~r:.r. .;- . : :-. . : :.: _- -".:- - '. ~----._. _- -_ _ _ -

.\".\".IT
.. ,
/ \ ' !\'l'/'Ctgll f)lht I
xxxiv The L'cono111ics o/Sol'ereign Deht I
T'lwL'co1101111c.10 ,..111orcdirticult
,1 .
. . , I , fi11anc1al et ,sis
to be no significant difference in the interest rates paid by nations under the two (lifferent , . that gave nsc tot 1c. , oical extremes, wl11lc
~
.
ovcrhan,'.s that may l1l turn m.1'. , Jc the probkrns ,ohtcncd idcolo"' . , I, t these
1 , s oravitatc to hct.c . f' cl strone: evidence t ld .

~
governmental arrangements. , (7007,
. In "Cities Constitutions,
. and Sovereign . I3orrow111e:
. . 111 Euro11e, 127 4 l 78'i" St'lsivage ry fie
- '' . ~ 0
<=
to resolve. The authors f'imlthatvoct."'
rulinn coalitions become, wcakc1.
' _ , .
1 ..
. 1v_ t,in,
Sufi, a11d T re.bbt . in, .id lock. They 11
,111 d ,,cncrate Ic"'
otslat1vc
0 1
f'illowino
I us.l"1tct11s
.. . en!
the '!ll,lll 1
' ..
' ( 11s1s

1
...
Volum, 1, Chnptod4), David Stosovogeconsidecs fiw-fwnd,cd yws of Westcrn 1 to
' L '
ve~igfi H' developments impede
.. by reference
,
. 11 1.1nc'ial re .101111,
, f

, l1lerns- with cc
l bt in"'the Un1tc( ,J States
t
2
"" 1
focuses on the bchavior or different kinds or regimes in the management or their so cratic cf1cct to p10
dcht. Stosc,vng, believes 11,c cvid,occ pcoeidcs weak soppo,t fo, 1h, ongmo I<' ,1so 01'2007-20[ I.
.. ] "detnO
advantage" argument or Schultz and Weingast (2003, Volume I, Chapter 22). But aying
fi,nls 11,et stoics with strnog rnc,chnot powcc pcdOcrn hettc, io acqomog ed,t "" I rep, ,h ,s,
L

debts. Further, he finds that the best regime type for strong credit is a smaller state, su
,
Port/// , .
S111erew11 ni,f11 . The /,011g View , 1111cntal O\ic'rs11cndi11g and
" f \!:OVC 11 " ()" tCeCCO
ci ty-sta<e, wi lb cepo hf icon coast rn iats oo th, emot iv,' s powc,_ . Iitkal . . the \'('/']'
' . Ill behav10r o ~. ." I l'crspccllvc II .
Mark Dincccco examines Olong - Fiscal
1
1l Prudcnc'C in_ HIS(()! ,!Cc1but he rclcts . '. to previous .
Acehec, Biglaiscc, ,.,d DcRm,co cootirn,c the c,plorntion of the impo,tooce ~o f)D~ . 111 . . I F,cononiy.
. .. .rl1c l'oltllca . , . . J(1)0- 191 -1, , , " ivcrnmcnt.1
01 restra111t 1111iry foctts is . 1sl1i11 between 1 I
iostit"tirn,s fo, sosc,c;go deht io "Som,igo Bond, ornl the 'Dcmncrntic Adsa"rng,_ ;,,;,er, . -10) c_-H 1s-qt1cst
p1 'to reveal tic I , rclat101
::-,l
1
R,gi "" 1yp, AnCct C ,edi I Rot; ,g Ag,n,y R"tiogs io the Dcselopi og Wodd''" Acchcc Bge,dgn (2010, Volume I, Chapte1 N tl it 1 movement towatl.. I ~C' . , itrn 1zcl
. 11111s
episodes
. . . .such ', is the orm, on 1- Jc he cone
,,1 'lllOnthcw10, litlcs 1, _' , rd or sma I Ier cIe'ltc1ts
. I,dwitha1cco ,
amd Dellou,n (2007, I l Volume 1, Chopte, 25). The ocnhoe; " " cccdit rnti,gs of 50 ' ,;,,ns "'""'",ons a,,vlf' "" I sohncy. . t is "'"'" 1' I
bom,wcc; to .scocc, ,o, o ,111 , '""" m m,1<lwoct 1,mess 'al 111st1tu.,.,J,,
onoss dd rc,,ot po,1t"'. fiscal institutions . 11
and l . rntcc . , I grovcrnmcn .
. ,, 1 credit . ns . !' , .. id bailouts . "lntcrnatH1n,1 ,. .
They "<g1,e th,., politic,I a,comgcmc,,ts ornttcc little to hood rnti,gs, wbkh see down by ,,~,s . . . ., I I 111 llcr}l). o1
;ollatioo, gmwth, mnl defoolt hisco,y. So, on thei, sicw, the pmspect ofcep,.ym,nl ccnlly m. pol1t1cal reform helps lo ict l tee sove1e1g1
l 'l iccn intcrnat1onc1 . , (1''99,11 Volume I, ('I.
rescues t,11 . . the
1
f
Michael Bordo d1st1ngu1. shcs. ic _."\\I l'crspccl1vc "Borclo . 1,1 ..,tor 'to avoid . a cl,cv,tlutl!on ' , ..0 1l the
.o, c,e, i,I rnt,ogs,
1.ou l , Ioes oo t ,es t on tl " t yp, o 1 po 1,, ""
J ,nst,''""''"
tJ" t>anowing natto
m w;ne
0 . 1 .. A I l1sto11c.1 , , , 1011 t c) , . nc rates 11
lligfa>iscc amd """'' oo,ly,e the cclotionship hctweeo sovmigo edit oo<l the hom>. '"; Rescues versus Bat 1outs. . f' l'mds to a sovct~"" ,., lly lloating cxc 1ld .<= , 'stors
Bordo, a rescue 1s . l 1c ext cnston 1 o/\f't t,1, the advcn.t O I -uenctd listrcss was to 1, ), 1out 111\c. . is .
'"'""". ', po 1 '''"' I st rnctocc m . "I",m, 1,,g tI" '[) J
Arnm,,.g,' m '"''"'"
Sovccc,gn AcindRatll" . f ;ser
.
11
Th, f mpm1amcc of Strn,g ( ''""'
Pmpc,1 y Rights hotecti on, nod the Ro le of Law" ll<g :.,,,, abandonment or a currency.
I 990s the purpose ol . gtc1n ~
, 1 cocf; I cto sovereign . (1cbtors
., t111u unc. s II offcretI f'01. the 1,11 . , \'stress 111
I Ill c was to avo1c I co11tau1on
1c1uts
. tl ic'r nations. .. 1 v
. - Bordo , '1
ontl Starnts (2012, Vohuu, 1, Chapte, 26). Foc,,siog no ccedit rntiogs io the spidt A> ighef ' . . . 1 typtca Y similar . cco , , nomtc ,t, Ltwo centuries .
dtH I draws. po,Jino tcJ
lligh,isec, m,tl lloRoucn (2007, Volomo I, Chapto, 25), Bi gb ise, and Stootrng,,, 01 thnt '.' "nee and lenders. The Just1hcaltrn . 1 "use
financial crisis in one nation . . llltg , .. r nncial assis'
1( Cd . . t111cc ()VCI
. , t olfcrs asstSlan . cc to s(t
- llU.~. C'
credit ratings for sovereign borrowers are associated with the strong rule of law, the prevd e analyzes the chanmg . c1uu<1c ., tcr .of t111s , 11. oc ' the terms. l wh1c 11 t r
1 1 111 .
nr strnog ""'' iodcpondcot "'"''' ""' the pmlcctioo or prnpecty ,i gh ls. _. , iSfi .1n1plications for how "' the IMF m1uht c 1,111"' ... et systems o
_ had three dt J()()(l"
While several inlluential studies have examined the influence of the democratic-authoitt,Hes L

st111
divide,,,, sovc,,ig, mdit, Kohlsclcn (2007, Voh,mo 1, Chaptec27) fr>coscv oo demo<', ,-;a,I .
n<1t1ons.
. . , I States 11<1s , Run: 1790 to
. I I l1tor lws
II ' . erts tl l,1t the Unttcc' ( l11wncc - . , in the Lons
lmt c,rns,dc,s. p,csn. I"" .'" I rnt I'" II>no pa,1rn m"""'Y democrndes. Io "Why A,-c TI ' ere Set
'!"'!Cl '
. ,;es John Joseph Wa .. is111dSS . .. 1 (iovcrnmcn . 1y 1c ol . gO\ctt ''. llllClltd ,( C1,1 to the
govcrn111cntal frnancc , ";\met 1c,11 , ., 2 ) Over t!lllC, . , the 111<11 11.,,rnrncnts, 1 all( I st. ,hscqucn . 1.; l lnitcd
llelin, ltc,s'' I' videncc from C'oost i t,tionv," Koh lsche,o fi ods thnt p,esideotinl den WCI" '"
Cl tpter _, . I .. iJ O\ ~ I I ,[it 111 t le
defmdt "' a '"" ol,nv,st fiw tin,ev ,s high os pmlia,n,otory demou,.cies '"" 11,e f,st """ , W:tllis (2000, Volume I, , . I . I st1tcs. then to ell, 1 ""t t1l ovcrn111c11ta cc . 111cnt \\ ;1s
.
n11grated from bcmg . l1lC Ill . d1Vt( lid . 'Jwrn the S Ilc1IC ' . ' () () ' C'hilc the IC( I' tl tl()\'l'l lll
cl, J, t '('\(CS
o I1he twc,,t,eth "'"'"Y I<. o I, Ischcco '""' ap h,s cose by sa yo, g, "I acgac that 11H ex , I1hnatt
' , ,,is0
1 C''

- I . I I 1 I l l 1 h s Cetc
lcdcraJ government. hir ex, , .. mplc,., tn titcs was""(1 pcrccnt.. \\ shifted rat .. !Cd lly- 'such t 1,1 . ,cJ smore
'
lo, t" son" , , m, ts >y a mon '" o """"g" mcow,,s lies io """ """'""""" . on , 1J , scvc1 c1 1 s ' I ires 1Jct( 1 1 -irncnt O\\ e
po ,i hos, p,, Iia, ncotany dc,o,,c,nc ies " ' less Ii k, Iy il>oo p,cs idc,>1 i" I dcm ocrncies lo dd"" ,,i, States that was borne by ie 0 1
J992, theses ' I the l'cdcrnl gm et 1 , lorninant
their 11a l1111t1es
l)ccause lI1e con 1ItIcnce requirement creates a credible 1111k hetwcen cconot11 responsible lor , only I 'i pe'rcent. nY
1 ,ivcrnmcnta I (Ieht 'I all( iticiiial uovcrnrne'Ill as t ic ,' . si;ahlc
1
Of
policies nod the e>cc,tiw's political vocviv,I" fp 713). , "' owed less that I O percent ' l c)('1' ""' ( , , ,crucncc o 1 t JC 1H the dcc1s1on t c) H\VC ' .
L

. , -butcs 1 the en 'Ill state all( I 1 1

f btcho,do , <HI Mami ''
io "Th, Po lit ics or Som, ign De f;ud ts" Hatchoodo and Mor":w than 75 percent. Wallis dltl
govern111cntal debtor to 1tl ic, 1'1clvcn l
, 1 if the cnt1tlcrnc
L ,

. . t locurncnt
Reinhart ant I Rem 11,11. l trt 'IIHI
(20to, Volume I, Chaple, 2k), <mphnsi,c th,t defrmlti,g is nltimntely a polit;cnl A '"L . . . , l I' J men!. tl 1 c prcscn, 1 . , . c" ..Rem 1: of .
"II, whe, ""ions de l,o II no I hei, p" hi i, debt, po Hti,,. I lca,d,rn "'" k, the o It ima,t, dw "''.;' "' Pcr111ane11t military estc1O is 111. 1 , ,,,th century to ,.Tenn l'crspcctt\ , 1l'cttmc
10 . . . t'll , nc cc . ;\ LonL . iicrs1stcn '
do so. As hoon,s "'I ios< iIot ioo" I lcanl '" th,.se po Iit ic iaos "'" he "lfoctcd hy m"""' "" ~<Y IT0111 the. bcgmnmg ic 1 rncl Ciro\\'t 11
. .. , . f), 1,J 0 pmcn , ' - . net.al et. -~1se.shave been . ,'1. , crises. . -.c11II into six
. I . . . . I fl' l I l 11 miltt, 111 'hna11c1al C nses, c\ e ter :n) that 1tll<l tli , r inalvs1s t1lcSc . 1"J'licir rnain
npe>nmng , "'''" ""'''""""" con '"' mnoog '"'" '" o1 "'""""""' "'" m ." I Chap.. t Ci(i - countries. , On iiisodcs c1 ' 01'!1112
I ilht10
""' ps .r1" ""' Im<.s st u, iy 1I" tI"""' ,ea
. I ac, I ""P"'
. .ea, I ,lctcnn """'"
o I ,1e f'a" It ao (! cxamtr,in I
Reinhart (2015, Volume,' 1 . 1.
1tit ccotwrnic
I ir it c,1s 1 , . till 1 c . I 11
1 ubscquc
five important historical defaults: !\rgcntina in 200 I, Ecuador in 1998, Pakistan in 1998, Rus. t 1c economic landscape1 l ' --ency eras ies,' , ciJisodcs an( s . Tiscs arc
;., I'J9k, ""' Ucog,wy io 20113. ii I. . types. such as cc
n1a.1or 1,t ( ct,iscs, CUii
, the occurrcnc~ , ,, l irt 11csc .
, . thcv shll\\ t ld
, I t financ,a , . II 1 l cclllcludc

.Ocus 1s . on the rclat1ons . .111P between , . , I causa 1 111 Ic'rcnccs, I loWC\'Cr, - , dn illld y
tic:-,
!\ccording to "Resolving Debt Ovcrhanu: Political Constraints in the ;\flcrmath of'Fmat.
. ,et,, J . totI1"lW 1 1
growth. Without trymg ' . Irn Im,1w ccono111 1c. g,rowt I1.
Crises" Mian, Sufi, and Trehhi (2014, Volume I, Chapter 29), financial crises have po J'l c,
- L'

often. ,
lollowcd by pcnoc . js 0 rcJU!leSO
11 1
 . ---------------------

xxxvi xx.nii
The Economics o/Smereig11 /Jc,/,/ I
ll1e L'conomic\' o/S .
tint " ' overeign Dcht f
' ... cns1s avoidanc, . R,
govcrnment1l . ' crec 1t 1)I11ty 1n
order to induce the necessary tl ow o f' capita I. J) nor
tot I1c French
(p. S75). , e supplements the list of' po 1icy 1n1tiati .. _,. , h"
{cmh1rt R ves lo foster long-term urowl .. . , lJO tl1 ]~ ranee and Lngland
b cvolulion -. had acco111111ocIatccI tI1e f'111anc111g nee<I s ol war by
Ad I ' , em 1iart, and Rogoff (20 b /.110 Wing, while leaving taxes relatively stable. In the telling of Bor<k> and White, France
vanced-Economy E )is()(],. . . 12, Volume I Ch1 . A.uined , its gov, , c1nment ,s repulat1011 dunng the war lJY con f'1scatwn, ancI Ill
11 cv1es,
capita fl at 1011.

no monopoly on f' . 1. es since 1800," dem .. ' 'ptcr 34) "Public Debt Overhangs,
.,lllthors 1dcntil"y
. (
111,mc1al
.
dis' t,..
,is ers or debt cris,, S onsti ates HI' t 1, .
d ess-dcvcloped economies have
.
sc1result tl 1 , le rench government had to rely 11nmanly
011 taxation to 111ance
f' l I1e war. The
,r1,, .
c ccts that persist, l f' .
7
- i episodes or, . , .. .
cxcl:ss1ve debt 'lll'l I ,cs. ' urveyin' . g tl le l<1st , . two-hundred years, tie I f '
grc1t e'. governmental credibility or Great Britain, by contrast, allowed a departure from
a dee'! I, ' " c ocument tl 7
a'. Icbt level, that is.ecl)Q orpercent . 'c c or more. In th ,., ,
of' C [ ,
.
en <1nc1lys1s ,1 , . , .
iat ~O or these debt balloons ha35
d
.
IIH1nc1 'Ii..I):.0 ,t11' t_y, l~ccausc lenders understood that the _Bnllsh
rcdccn' . . government_ WOLi Id eventually
ongcr. I urth,. ll , , J )I or great,. - . '' er isis occurs when a country '1 or l b 1 itscll with mvestors. As a result, Britain succcsslully engaged 111 1ssurng huge quanlit1es
01 , 1I c1, icy f111d t11, t tl c1, with llus , . 1 .
o s owcr cconomi, . d icse debt over! , . cone 1t1on persisting for Jive years ,c.e t and abandoning the gold standard temporarily.
If c g1 owl11~-'1 ldngs arc . . . d , . r, he .nrl ' Y pd1 t o 1 lI1e rnnetcenth
century saw w1despreac I strugg Ics 1or Jill. Icpcrnl ence 'oy new Iy
t iosc advocating , , . , n outlook that has b, associated with subsequent perio s
R. I expc1ns1onar ., . ecn lroublin 'l . !IY en1erg111g
. . , tions Ill
n,1 . South America. Marc Flandreau and Juan ,~1 ores exp Iam . I10w tI1csc new
cm iart, Rcinh1 t y central nove. g o many economists es1Jcc1a
, , , . . ' ' , and Ro' f. b i nment or , , . . .. , . . , nations' wit. l1 no history
''B . or sovereign debt, managed to enter the sovereign . debt market m .
l:Xpl,m<1t1on of ri11w1 . I . go t (2012, Voh11 ' I cxpdnd111g ent1tlcment reuuneS-
.re rcrs to a suite.1, or cw 1epr<'i' . . . nc Ch
. .11011. While the tee! . , , ,lptcr 34) is also not'lblc bfor its . , nd s and Brands: Foundations or Sovereion Debt Markets, 1820 1830" Flandrcau and
I b .
ce l. hir cxam11lc 'l gove1 nment I . .
d polic1es tint 11'1
lll1quesI . off . . . '
111c111c1al repression viry the tcrJll 1.; 1ores ( 2009, Volume 11, Chai>tcr 2). The "'investment bankmg . houses that brought these
, ' governmc . ' , ve t 1e eff,, . ' , . sovcr
c., . cign , . issues
to market played a critical role 111 . assurmg. 111vestors
. that the borrowers were
m1g 1it require banks to. . . n1 might direct its b I _cct o_ f reducing the cost or public
i Iowenng . the cost Iller 1 l<~ec'._'~1lc, and they did this by making their own investments in the sovereign issues. According
,me f' Icase . tlieir reserve rec1u .,dn zs. to llVest Ill . the novernmenl 's debt or
S I . . o , t ic gov , . , I! ements th . 'b . , r lc1ndreau and Flores the ittlchiiienl or an investment house's na!llc to a bond issue
t
b .
. c iulanck and T1yl . f' c1nment s debt i2 ' e1e y mcreasing the demand for,
01 1un . . 1
of oned as a type or credit ~ "' '
rating. Most notable a!llong these finance tirlllS was the House
In cJo1ng
so, the 1utl1' .. I ocus. on l Ile 1870--2()()8 .
tl 1e1r article, "Cre(l1't ' 0 1s c eve!
1' op a new data set 1~>1 pc 14nod to consider . credit booms tnd busts. ir {olbscluld. Rothschild became famous in this market for issuing only good credits. Other
C. ,ooms U . . " count ' '.V~Slment houses worked across the spectrum, working with very solid issuers as well as some
r1scs, 1870- 2008" Scl I , . one Bust: Moncta. l' . i 1es covering almost 140 years. Jn
TdY IOJ. identity
. , an Age 111 r anck, I " ,iy ol1cy L I ll<1t1ons
M ,Ill( I aylor (20 I 2 V ' eve rage Cycles, and Financ1a .. , WI10 p1.oved to be highly . .
unreliable.
contrast this earlier '1gc o l oncy during whicl1 , olumc I, Chapter 35) Schul'lrick and ChSovereign Debt in Latin America, 1820-1913" Paolcra and Taylor (2013,_Volumc II,
I, ' wit 1 the money , I . , ' b _apter 3) ldentif1cs four waves of f1enzicd investment in sovereign ISSUCS _by Lat_in /\rncncan
l,tve allowed credit lo , post-World War II A,, , ~me credit were closely tied. TheY
cone!. m Ic l Iiat high . levels expand 1 with . out a concomit'111t ge of . Crccl'tI 'in wluch financial innovauons . 01 iowers. Each wave of'b<irrowing owe rise to a series or defaults. Soon alter delault111g. may
rcht I o credit ' lllcrcts , . intnes
COL succeeding in borrowin\.!: 'l"'lill t:>' only to succumb to the next rash or defaults. l'aolcra
' ions up that policymalcr. . cany warnings 'lb ', e Ill the supply or money. TheY
' ' s ignore , l l1ic peril orus
c1 ' all out t 1e piospcct . or financial crises, a td Taylor explain ~hat high cxp;c\~:, r;turns continued to entice borrowers. Both economic
a~l~1Cla111cntals and political upheavals played major roles in bringing on the defaults. The authors
: 0 ei.nphasize the continuity between the early experience or the 1820s rorward with the wave
Volume 11
~f defaults in the twentieth century, particularly during the i 980s. These same f'catures also
cxen1)1"f, I I ied the Argentmc . delault , ol, 200 I.
I 'urt I 7''/1<' "f,o,w" N
<', 111/'{('('J/{/i (' I'll/{//'\' Si2cbt lr:iublcs in Latin America also plagued the second half of the nineteenth century.
(' ottc, Vizcarra, and Wandschneidcr rocus on a particularly revealing episode 111 Military
;\ number . or histo .,
11c1ns have , .
numcnc boundaries p. . conceptualized th, . vt~!ucst and Sovereign Debt: Chile, Peru and the London Bond Market, I 8?6 1890': SicoHc,
l .lobsb, . conceived ' ioposmg
the . a vari e'l y of, alternative
c nrnetccnth , as running beyond .its
, ,1wm, 1, century ,7:c,irra, and Wandschncidcr (
2010 , Volume II, Chapter -l). In the War ol the l'acif1c wlHch
rcnch..R,cvo Iut1on . lo the be nineteenth
,i . ,
. century as cxte !'-cc1tes. Th, F
_c dllled Bnt1sh . . historian, brJC
-, . ~turrecl in 1879-1883, Chile conquered substantial Peruvian and Bolivian territories. These
I
the. Bnl!sh and French wars\t1111g oi World War 1,11 1r'.1c ing '.rom
1789 to I 914--fiom the 1/lqucrcd lands possessed considerable resources, most prominently nitrates and guano.
s~\_Porting these commodities generated substantial foreign currency that could be used to
~~~e
d1s1 upt1on in global !inane., I l<1t su1 roundcd the o11, . this yc1rt, we focus on the years froi11
11 tl iat I)egan withenmg )/ sovereign debt. As the \.irtuncs or war shirted control or these kc_y territories, bond
; .,111 the .s,cvcnteenth and ci ',1 markets
_,. W .of th,e nmctcenth century until the
I 1c111cc had persisted . I g llecnth centuries F ,J, or Id War l. ~o\~(~-s rcs'.1onded to the tluctuating nbility to pay tliatd1ese victones ai,1d' defeats lll'.l~l1~d. l l '.3[,'(
1nnov' c . wit 1 more tra I' , , ' ,ng ,md had buil . . , . , ol ot resources did not provide a total explanatlllll, as the p1101 c1cd1bil1ty of ,1 cou11t1y s
. I '.1 1011. As Michael Bord< , le iUondl forms or fund ., . . t st1ong f111ancial markets, while
rnd 1 I
dllC hcnch ]"
Cl , l <Ille h1ge 11 WI
' 11 u111ce durino tl , , ic1ismg
c 11tc cxplai .. ', I m not embraced financ1a I governn
In , lent , c1lso, --
allccted bond pnccs. . . . . . , _,. . , , . ,
r: 1,1ptcr I), that financi'll lb 11c Napoleonic W1rs" [>n in A 1 ale or Two Currencies British of. Uie American Civil War, the Confederacy was always noto11ously ~hmt ol 1csourccs. One
he. .surg c .in f'inancial rcqui.' )Uc <w1rd' ness came home , . l>Ordo ''Ill l I "V ..
v hitc ( 1991 Volume II,
its probleriis "''l tl 1 tit.J<JllS is debtors that some ( onlcdcracy states had
car , - ", s 1c nuscrao 1e repu , . ,. . . . .
nalion as discussed earl ie1 111c11t1l1~ms indueed by war cl11(lll roost under the stress oi- war finance, ~. ncd _even bel'<ii, tl - t1 111cs 111 tlic 1830s and 1840s, t londa. Lou1s1a1w, and
,v,iss .. . e 1eopcnmgo 1 11os1 .. -_ , , ,. ,", .. , .
11s. 1nt roel uet1on.
Bordo,' engcsI W .. tl ic fund-raising capacity ofan)' .1ss1pp1 had defaulted in the London bond market.1' Bclorc the w.11, Jellc1son l)c1v1s, who
,Ill< h1te e1 np Irns1zc the importance of'
 .r.rxi.r
. .s "e,c0.;n
Till' /ico1101111,s O1' 1
Dehl I
, _
-~Y.1::_:.1:_:,~ii:_i _ _ _ _ _ _ _ _ __:_T:.:_11::...e..:..h':.:.c:..:.0:..:.11,:..:.,1:..:.n:..:.il:..:.s...:.o:..'...f..:..'S:..:.o..:..1(:...:'1..:..e:..:.i,~::.:.'1:...1l=)..:.e:..:.hr:..:.I:__ _ _ _ _ _ _ _ _ _ _ _

- . ccI -bts' As. sueI l,, ,the Roosevelt . I

( orollcuy
was to become President ol'thc Confederacy, had advocated debt rcpud1at1011 w Ill1e he wa S. ,in ,, _.,. to pay thell' '"<run boat dip ornacy. "
compelled to act to "urge count, Jes , , !nown disparagingly_ ,Js , "' , lJ S military acting
the U.S., senate. i\s Marc Wc1denm1cr . . explains . 111
. .. C,unboats,
, .
Rcputat1on, ,,lll(i SovcreI!:,
, iter 11 f, I , t lns become ' tl -eJt ot t 1c "
presented a justification o w ld ' (' lliry as merely the 11 ' . 1, tl it the articulation
Repayment: Lessons l'rom the Southern Confederacy" \Vcidenmier (2005, Volume II~ Ch,l_J,bel I R eve It oro ' I -1 11 oss1111 c l,
While some might see t 1c oos _ ., . iterests, it is at eas . " itin America. This
5), "The South sent a clear signal to foreign investors that they should stay away fro_m cY ,e , .
<ls the col lect1on agent o pi ivc1
t' : , tc frnanc1.1 1 11
_
. l nJt1ons o ,,
tl , erncro111g de itor ' . . _1 1 f) ,blic Goods, and
war bonds" (p. 408). /\!ready in I 8(12, scarcely a year af'lcr the war began, the ( ,on tedera , .3 -- . . , 1 , I1enel1ts on ic "' ., '"Ernp11c, L
o11ts pnnc1plcs conlcrrcc some . , Wcidcnrnier exp 1()le 11 1 , Chapter 9). Rather
had already lost access lo trade credit. Nonetheless, the Confederacy was able to float" ay I M' J , r wd Ma1c (1()5 Volume 11 , .
isI t 1e topic that Kns 1tc 1cne ' t Wcidenmier ( 2 ' . . , _ . l'vV that debt prices
111illion issue in 186] in London and a paltry 2,500 issue in 1-lolland. It used thcfunds _tc\::pt . 1 "1\'lt I hcner anc W-,denm1e1 s ,
f', _1 'Jth of' Rooscvc t s
H
l 1e Roosevelt C orol ary c _ , t l\!litchc11er amI e
its major 111ilitary contractor. While the Conf'cdcracy never paid on the Dutch issue, rt_ , . . , . . . 111cre th1cc1, the a term, . 1
than v1ewmo the ( orollary c1s cl _, tl .
111 50 percent. ill , , d is a rcg10nal
paying Oil the London issue under the threat or losing access to war materiel. Only imI11Jn~ut 111 , '=' . . , , by mm e l, t cqucnt 1y ,1c 1c , "
of Lat111 American countncs iose , Uiiitcd States su 1s . tit, 1 y and peace.
final dcl'cat in the spring or 1865 finally led to a cessation or payment. Weide11mier pornts es I1, t .. 1
tie - I f' 1ncia s ' , 1 11
I speech. The authors conclude t c1 . ds of' increase( rn, .1 _,, it to pay debts,
that t 1csc sovereign issues on Iy 11111ountc(I lo 2 percent or total wartime ex ]"'ildI(lll IO 1
. . . he gem on and 1wovidcd the g t a I 11 ubl1c goo
,v , . to
.' " 1 rnd fo1cec, 1 .ven mainly to
-_ Srnto Domine-( '
emphasizing the limitations of'tradc sanctions in encouraging debt payment. Richer access -ol Although the United States die l 111 tci, vcne. _l1l ' '
. istancc was urnque , rnd
' was (111
the credit markets of' 1\uropc would have required the ability to provide the lcnclcr with con!I er M. . . ""UC that t 111S 11 f'
f f 1tchcncr and Wc1dcnm1cr Hie . _1Jations. . , . . is an example o a
o c, 011 f'ccIcrate assets outs1c
. Ie II1e (_' 011 j'C(j cracy, or would have neccss1tale(
. i a lllL ,eh bell ,orcstal I 111tcrvent1on
. . by Europe,! - 1
"n ere( 1101i , 't ir nation . to pc1y , on its cc
reputation f'or lrnnoring debts. ff 1- .1 1J1.s, id .
Sovereign De, t
, .. - ., , , m1pel a cc 11 e . - --s crsa11ctwns ,ll . 1J1
he use of 1111 litary frn ce lo Cl l W-idcnm1cr 111 up . ()) The authors slue Y
In "The Gold Standard as a '(iood I lousckeeping Seal of'i\pproval"' Borclo and Rock'~ y - M' J 1crrnc c II
supcrsanction
I accord mg to itc lCI ' (. 2()1 o Vol11111e ' ' f' l LlillCnlLIS instances - Ch1pte1 1
(1996, Volume II, Chapter 6), the authors maintain that adhcn:nce to the gold stn11daid: 1,s ),cpaymcnt" Mitchener and we.tl lcnm1c1
, '
.. r globalizat1on. . They .,nc , n ,fiultcr and l1l . some .111,
I ~ tl ,f,rstct,JO ~
. I.1111port111g
capita . . countncs . serve(I as a s1gna
. I ol' rcl1ab1!tty
. .. to markets. The
. penp . I1era I ''Ot1JllllC,
'" ic I
_ , ucolt1e(C, 1 1
t leI period from 1870 to 19 Jc . the customs reven Wcidcnmicr argue 1 ia
or Canada, Australia, and the United States succcssl'ully adhered to tltc standard, whi d . I . . . . 'ncd to seize I c,11"=1
, 1 .. 11 aymcnt. M'tchener am .
Argentina, L3rnzil, and Chile attempted to do so, as did Italy, Spain, and Portugal. [3ordo ,a\ W 11c 1 creditor 11at1011s mtc1 vc
.instances
, . .
to use military lrnce . _., to compe Ic ,
1 . I , trcmc sanctions
. l very clfecllvc ' . 1 , . has been 1o tl Y
.. , , ,J), wit 1 ex 1 11
RockofT argue that adherence lo the gold standard, even if' not f'ully successful, served 'J dS
creditors im11oscd supcrsanct1ons , 1
fec1ucntly dill i ,bt J lowcvci, , . this cone usil
1 111 I
commitment
I device for the debtor nations. Debt markets rewarded this commitment Wi th ' . .
llnposcd
on more , ,
than 40 percent cJ f de fa u Itee1 e e .

owcr mtcrcst rate, o f'ten Just
s 11ghtly higher than the British consol rate. These coun t nc s '.
JJso
disputed.'''
had lower liscal deficits, their money growth was more stable, and they sufkrcd lower inflal'. 0.d11
rates as well, thereby actually earning the good housekeeping seal of'approval that gold sta clc1r .
1 117 I' 'f'\'j)('Cfll'l' t I
adherence c:xc111plificd. 11 Part// The Titrntie1h Cc11111r l . thcoloeical conte:x 11
-
I1
Jte from s I 1cd
111 the late nineteenth and early twentieth centuries twine a colony orGrcat Britain had sorn~_ , . . s 'J meaning quite scpa1, Ricardo I lausmann, atcr }_II_' i
F-or sovereign debt, ori!!,inul -1117 h,1. ' . r:::chcngrcen and . , l irrowine 111 a f(m:,1:,.,
bc11clits. In "The Empire I:fTcct: The Determinants otcountry Risk in the First Age 0 , , . ~ , . . 1999 ' Bany. ' -iitional brnim
d scncs oi'JY1Jlers bcgi1111111g lll
-- vme--t 1ie 1( l{itcs 111d l1nc1ncic1
.. , ,, 1
Cilobalizatio11, 1880 19 I 3" Ferguson and Sehularick (2006, Volume II, Chapter 7). 11 :~ ' . J ,n in 1nte 11 ' - . - "'Fxehangc ' ' - .
,1uthors maintain that British colonic, saved more than 150 basis points in borrowing raH:-~ by Ugo Panizza, studied the ongmc1 SI_ , , . in this senes is " _ l) P The article cxplallls
,currency by developing nations.. TIl c first pc1pc1 11 Ch1pte1 I . . n
simply by being part or the empire. Ferguson and Schularick also emphasize that the marh. r . l'\('9 Volume , _' ," I , l"rccn and I lausm,111
,Tag1lity"
I10 . Eichengreen and II ausmrnn ' . . ( -'.!'.Ithe' borrowmg
. 111011.
11'. . Lie, Jc1"' /\ nation can (I II,ll-'zc I
was wise to ofkr such a discount. Between the World Wars 110 British colony defaulted, whereas 0
many .Ill(Iep~1'.c Ien t eI~ t1tor nations<
. 11cI (Ie f'au It, 1nclud1ng
Argentina, Brazil, Chile, Mexico.'
J111an,

w origi1nl sin le1ds to hnancia I fi"1"1hty
'c- . lll , roblcm O 1 l1n" c- 11 ia 1sii1.
. , lily irrcvcrs111 c " nd
.... , . ire, only two ways. 1(i 'wo1d l1f't]ic
argue that there ic 11 U.S. do! Iai' . 1t a prcsulll,J I rcsi1011sc 1s. lo1 l u 1 cI
Russia, and I urkcy. I he authors suggest that poor countries !'ace a trade-off between polillc,11 ' terms o , s ;\ scconl 1 1
, _- ,
sovereignty and creditworthiness. (set the value or its own currency ill . . t. own prob 1cm.. _ . " internal domestic
constant level) but this first met ioc l I bnn"s I s
"'.. s diflicult, ,cqu _, ,res st1 Ollc-
In his 1904 Message lo Congress, Roosevelt ( 1904, Volume II, Chapter 8), Theoclor~ deep,, domestic, frna11c1al
, . rnc1, 1I<c'ts'' but
Roosevelt articulated what has come to be known as the Roosevelt Corollary to the Monroe . ,this I.er a Ieng tl 1.Y 11eriod., 191 "l versus I ()7..,- J9l)7"
rnst1tut1ons,
. . , . , , 1111hshel1ov . c _. es: I S8( 1 study tIle. emp
, irical
Doctrine. 111 his message, Roosevelt dcf'cndcd the right, and even duty, of'thc United Stntcs_to and can only be c1cco1 bt in Fi11ane1al I is . I Meissner ..
intervene in the affairs of' its "'southern ncighbors" in instances in which a nation exhibits_
1Borc10 and
'
Meissner
~
In '"The l'cilc ,1t'Forcii..:n Currency De 'I
(2006, Volume
,JI C 1ap..
' , , -rcnce
.
or11,wncic1
,lenses. ~ '
t"r 12), Bordo ,111( . . 111,y ireue that ong111c1l
- , iicriods they examine.
,
"'chronic wrongdoing, or an impotence which results in a general looscninu 01 the ties oi 11
civilized society ... " Thus, ,1 general breakdown of govcrnme;l! in some natio~ of'thc western
-,,. - . . . , 1 .- mltheoce1
c111<1l1onsh1p between ong111c1 sm cl_ _ . 11-1 in c1thc1 . . f"thetwotirnc
. ,,,11,
l- J9 I "l pcnod, ' c ( 1thcrs
~
1 1 11
hemisphere could lead to U.S. military engagement, Roosevelt implies. I le also particular!~
,
0111(Ioes not always imply f'maneJ'll ' frae - Yitcd debt 111 the 188( 'tt ., orieinal s111. 11 0 ' vcvcr
S c countries borrowed 111 go I(l-denomin, 1 11
_. I both there I1 Y co1nrn_ ,. ""if' orie.inal1 I c c-"the
notes that i r a country is wcll-hchavcd and .. _.. i r it keeps order and pays its obligations r llorrowcd in dollars in the 1972- J997 pc1 ,m, . I 110 t Inste,Je ~
s111
l 11ia11ag.emcnt1 111. th,
1ial
then there will be no need for U.S. intervention. This statement, \Nhilc a clear articulatJoll , 0
s nie, countries . suffered
..
.
, . ,, J crises,\\
,J 11
1c others di(
,
f'
"ood 1nc1nc
. Ill c
the Monroe Doctrine generally, also specifically recognized that the United States might b~ 0 fm,rncic1
(Ictcrn1inativc !'actor, Bordo anci Mc1ssnc1
.
"
, .. ssert th,Jl
cl. -
,c,
 xii
The .
Eco1101111c.1 o11c
., iwidi!,II
, Dehl I
.
::_-':_I_ _ _ _ _ _ _ _ _ _ _...:.7:.:.h.::.."..::1'.,:.:'c:.:.o:.:.11:...01:.:.11:.:.ic:.:.s..:<:::_1f..:.S:.:.:'o..:.''.:::<''..:"<'.:.::i,is:::'':...':::D.::.e.:.:.l>:...t:...I_ _ _ _ _ _ _ _ _ _ _

l - . 1, response 1s o, .. t increase rcgulato1y

.
iorrow1ng
, country prov1c Ics t I1c I,cy to uncIcrstam1mg t I1e c1It'f'cn:nt experience
s of various . . m
c11ses . developmg . , , suggests.. tl1d, t the
. count11es appropna
. . . e lt ,. they ai.oue, when
l , iuite ddhcu
the tinanc1a
,h Boone and1
0
countries. , in . . . . Th1scan Jee , s alreacy !:,
constramts on the f111anc1al secto1. l , d when leverage L . 1 t 111
the reoccurrencc
Bcf'orc World War I, Russia, Austro-Hung,ary, and the Ottoman Em11ire all borrowec1 sector enjoys substantial po I.1tica I strengt
. ' .. 1 ,lll nations can gu,ird a"ams
Iohnson conclude with
0
foreign currencies, The war destroyed all three empires, and successor nations took ehir~1e1,se11 , rccommcnc' , ht1ons 101 1iow
0 1. cc::I bt sur"es.
approaches to managing their inherited debt. Ly.ndon Moor and Jakub Kaluzny explore tlicl." financial crises and sovereign 0

issues in "Regime Change and Debt Dcfirnlt: The Case of' Russia, Austro-1 Iungary, ,uic , ,r
tw
Ottoman Empire f'ollowing World War One" Moore and Kaluzny (2005, Volume 11, Chapte. Part II! Crises of the 198()1 and i 99 0.i () the most a!Tcctcd
13). Following the war,~ Russia repudiated its debt; Austria mostly honored its pre- 1\'.1; . . , I l the 19 8 s, . ..
obligations; and Turkey engaged in 11rotracted negotiations eventually leading to a pa.rtiat l-he 1980s rnd J990s each saw m,L. . fi11a11cial
, ss1vc ' cnscs.
. , II those 111 L1t111
' Amenca. fhe
. Id part1cul,u Y . . Jly followed. It
honoring ol'its debt. The varying debt-repayment responses o!'these countries reflected diir,c::I.encl , . . 10. 1s of the wo1 , . .. ,,i1 Cns1s qu1c.:'
countries
I were the developmg nat '. , .. , . The Asian [ 111anci, , U itcd States to the
desires or needs for access to l'oreign capital markets. Russia's repudiation led to a ong 1eno ., {' I T u1h Cns1s. ! l ought the n
I 1 ~90s brought the mid-decac e cq ' tc) rtussia, arn JI . tl , . rt eXJJlorc these
;1r exclusion from foreign borrowing, while Austria qui,ckly regained acce~s to foreign ea:~:~~:1 began
b
I !\ leap 1
in Thailand, swept throug l r ~1c1, ., I , pocalypsc. The a1-(lcsm
.. IC . , tus the11 '1end 'of' 200 I and
I urkcy stood 111 the nuddlc ground, rega111111g access to foreign borrowmg after a lengthy pe . . . t, J f111anc1c1 ,1. , I tl , t be"an a
(lennk of'a completely unant1c1pa cc "entine dcfau t ld "'
Moore and Kaluzny argue that their analysis supports a modified version of'the model of Eaton l . . .
and Ge,sovitz (1981, Volume I, Chapter 4), .
., I 'tl
cac cs of cns1s, a ong w1 1 tl1e f'c1llow-on A10 . . ... Rules of .I,hum l, 1 111
l

continues to this day. . . ffcr practical advice 1;~ Chipter 18). Taking a
Kirn ( ) ostcr 11nck
an d Jo Im Landon-Lane provide an extended analysis ol ll1c Russian

I S0 Paolo Manasse and Nouriel Roub1111 o . . (2009, Volume. ' .. 1', 1980s and J990s,
. anc
rcpu~ 1aUon l its
Iong- 11vecl a 1tenna,: I1 Ill "Hope Springs Eternal--Frcnch BoneJI10 Icl"rs e ancII,1 ' .11HI Roub1111 . mly
vereign Debt Crises" Manasse ' . l , ncentratcd prnn, . in .t.1common harbrngci . .s
the Soviet Rcpud1at1on ( 1915 -1919) Oosterlinck and Landon-Lane (2006, Volullle. ,j, . . . l ,1, It e111sOl es co . , , J to d1scovc1 c . I tl ,
re c1t1ve!y broad view of 54 cc dU . ~ It e1Jisodes c1nc . . .. nornic s1gna s, icy
~ de dll
Chapter 14). Even after the rise of'the Bolsheviks and the Russian repudiation of the Russian ~. , 1ze 1 ' !1t1ona 1 eco , It.
,vianassc
0 J and Roubini seek to categrn 110 t find unconc , . tl brink into dclau
Empire's debts, Russian bonds continued to trade on the Paris stock exchange. Perhaps . WI111e they c1O Jcbtor llVCI ic , ,,
. . Iy, tI1e pnce . cI.1scount Jl uctuatcd v1olently,
1t but Illlpcnding sovereign cnses. . d a sovereign c Ml: !ten intervenes, t1icsc
surpns1ng initially !'ailing to about 50 pcrcei.' . ,. II . mbmc to. scn nic prob I,cnL' . s the. I ., o Rcsi onse: WI ,, t th,c
SO,<lll ,tn'.ding above 95 percent of: par. Ooster!inck and Landon-Lane recount the long h , _.1:i
diguc W that several factors usua Y co
1st . , ",. riousecono1 ., 1 Crises and the Multilatc1,1
. 1 . 1II, Ch,1ptct, . 11 19)
of tlus Isanst debt, which cul1111natcd only in 1996 when Russia agreed to make a pc1i,tl It 0 .11 hen sovereign debtors sutki s~.
I t
crvent1ons . being the topic . t "[ manc1c1
O
, 1 md IV 0 <
y lume
I ly (201 ,2 , o. 'S Since tI1e11, er
.
. iscs
repayment ol'the empire's debts. By then, the bonds had an almost century-long status ordetau , , [" hengrect , . , few c11sc ..
and zero payments. d1storical
1 Record Shows" Barkhu, ~,c ., tc1 ! 980 there.wc1 c. I . 1.,11ure of' these recent
Ti c authors note tint durmg . the, tI111. t Y yems up Jisodcs. One, p,1rt1cu di. c,. , on sovcrc1l',n . cc J ,[ t
One of'thc most f'raught periods in the history of'sovereign debt was the period between_ th e Iiave come l"lJJidly ' clusterrng :- 111 . f'ive, di ffercnt er1 "1nd a low cred re 11ancc J with tlus . piob-. en ,1
two World Wars, which Barry Eichengrccn and Richard Portes examine in "Debt and Dcfaul'. ,, . ' , . . . , er"ency Jene 111a ' , inc way to cIea . , 1. in1
Years is the ready prov1s1on of em o I ly sugl',est th,1t l . 1, r r reduced payments
in the 1930s: Causes and Consequences" Eichenoreen and Portes (1986 Volume II, Chaptet re st I-Uctunng ,
81rkbu 1.,1cheng 1-,cc n' and I\! oc t "enc1cs ~ . tl1c,11 11roVIl c 0
I 5). During this period, the United States became the premier international lender, but son1e , . . ' .' . "with con 1110
ci, :sis in
M '
.
is to structure sovereign bo1 rowm 0 . ;\mencan debt
countries of' northwcstcrn Europe also provided significant capital. Interestingly, diffcren;. t'lilles
. of financial . distress. " Latin 1.. tl , t
lenders seemed to have systcmat1cally varied results, with debtors havin<> different patterns 0 W .. . the still ongom": , . ?()). Meltzer notes 1' 1
,.,,oesinon ,(((haptct- ., , s
nt1ng in I 984, Allan Meltzei zci . 198 4, Volume ' , , , as importers, sue 11 ' 1
returns on and
borrowing theirvarying
lending.incidences of' def'ault. As a result, creditors enjoycclor suffered divergent "The International Debt Problem" Meltz%-\ ,ria, and Venczuel'.1,;ts ~~:cicnt in hydrocarbons.
11
the crisis affected oil exporters (Mexico, 11?c~1 was roughly sel f_sL\ncial distress" in Brazil'.
We tend to think or our own age as the age or globalization and robust international financial ,entma, W 11 pLibl1c
markets. This proclivity ignores the first great age of' globalization, which World War I brought
Brat1 , 1 . Also suflenng ,, . was /\ Ii:, 1 am 111' .. cntal 111
. po 1cy 11 uc, cc cwc1
11
, j
iv elt;~er finds ,.... a direct relat1011 1~
. l '[WeCn . ,J exhibited stron~l', ~,, !!,OVCI Iark1111 et pol icics create . the
to a9 sudden end. In "I listorical Research on International Lending and Debt" Eichengreen,
M,exico, . and l\rgcnt111a- a . II tl . 'C ol wh1c 1 I , , , 1nt1-hcc-1n , . xcess1vc 101iow t: and
. I " . in<>
09 !, Volume II, Chapter 16), Barry Eichengrcen seeks to understand the dimensions of llC
01 1Jy dot 1c 5 e'
re,source allocation across the ecrn , , 1omy. Not MF's behavI01 s - timulatcs . ., c,
the debtor na t1011 to rully
twcnticth:ccntu'.y sovereign debt by comparing it to that ol'thc pre-World War I period. Writin~ co nc1ll1ons . . but the. I rather t ,, ,'1Jlow1 11 a
for financial distress, 11 111
in 1991, lollow1ng the LDC debt crises of the 1980s, his special concern is to shed light on th c 1 ou 1
,
Suggests to lenders that they WI11 lJc::, [yuJcc ' . , ., of the 1 "() s. ', 1d he .
very recent past, but he seeks to do so by considering the overall dimensions or twcntic th _ I1 90 11
century sovereign debt markets. c e ,auJt t ,Jnnctcnzc . d the cld 1 the U111tc, I .S't.i tc.'S 111
Jeffrey . Sachs rocuscs on the ba11 ou ts. tha c ' ' esp..:c1,1
, . ments, .. , lly that o l n the run-up to tl.1c
' . .,I).
~
Peter Boone and Simon Johnson write in the af'termath ot'thc Financial Crisis of2007--20I I , . l't1 01. gove1 n 11 Chaptc1 - , , . Til
and the Circat Recession in 'Forty Years of Leverage: What Have We Learned about Sovereign ~lllphasizcs the comp! icity ol ci:~\ . . ( 198 6, Volume '. b syndicates ol commci '
1Managing the LDC Debt Crisis Sachs . onducted mamly .Y ntions. ;\s a result, m,l11y
Debt?" Boone and ,Johnson (2014, Volume II, Chapter 17). They find that financial cris_es c..ISes or the 1980s, sovereign Ienc_n f 1l',~ was..cvc Joans to cc 1,velop111l', - 1'
typically lead lo a jump in sovereign debt levels. They argue that the experience or financIHI hi'n ks that pooled their resources t0 fund mass1
 . .,,, ...,,,o:.,,

. .diii
Dehl II _ _ _ _ _ _ _ _ _ _ _ _
. ,1. oj')"o\'l'l'l'J.;11
xiii The l;'conomics o/S01c1t'(l',11 l>cht I _ _ _ _ _ _ _ _ _ _ _ _J_7'}_'10:_1c'_1.l~:,.::_o).!;_11~o~111!!_"~~ ' . . . : ~ ~ ~ - -

large commercial banks had more than I 00 percent of, thcll' . 11 Defc111/t
. . capital
. comm1ttcc
. I l O these
sovu into
, ..,eign
- !'Cir/ I JI T/1e Risks and ( ,o.1/s O1smerc1~
' . bly carnc s IJOI tly 'tiler the

loans. Defaults
, by sovereign
. debtors had the potential
to throw these 11 sl v. c .
f'.. ,01I I lemcis itegY
1
hm,kn,ptcy aod ""'' , "''""" . h,"n"al
. . cns,s.
. . As , ,esnh, ilk authrn clam,s. ,. "'The. st1, . , i[,e - l IJC, Irnsts . o 1 11istory, prcsum.i . l lcndinoc through
.I'he first sovereign dclau ' Il, IlIC ' Iden Ill . , . , ' 11.crs1stcnt . rciturc '. (), 1 sovcrcILJ:I
I I-lornc10 -. Sap, ' ..' IZ<i explore
or 11,c cccd ,to,
. gowm ,ncnts 11,e,c[,o,, co,I '""' ,rn,nd o,,e pn.nc,.pa I go,,. I.."'"'n1a1111ng
. ,, fi,sl
. sovercion loan. And tIcF<it itt has been Leonardo
first cl ,,1,a, [Inez, dillid Sipnza . (- 1107 ' Volume
sm icing or e<nnmc,ci,I b,m k cl" i ms by the dcbto, goyc,mnem," [ p. J98 ). E 110,1, k"'.,ccs,
iv
I 1
l 10 recorded history. c Juan Car , Ios. I I'1tchonc , ." o,l-l'ltchonclo, !Vl'lrtincz, ' ai
, l hul! 'the c1rcums'
. trnccs that
wodd connnc,ci,I '""'" ,I oat led to " me1 ange ol, pe,yc,s, po 1'"" muI conscquc ., .. rroc 1
including bailouts that rewarded bad !encI111g ic iav1or, as we! as massive cap, cl ' "The Economics of Sovereign Dei'lu - ' ts' , in ' issues: t11c co .. sts ol tc' rncr12.in12. ccomimic. s rcvca . c, .
oI1,e12.ips~ in our umlc,st111t
. l I . I . 't I tnnsfc1s,;,g, 1
pon, comH,ics In ,ich con,,tcics. II, Chapter 26 ). They focus , OI three . ,
111,1 d charnctensues
the .. l '. mg.1, .1
111 1 1 01

llrcquently .
signal . , I' c"dctau I. ,,Illl y survcy111g
an 1rnpcm . the s1za .1 c., , orcal num l cr ol stUl. ,Ics.
"U.S. Con,.nc,ci,I llaaks e,d the Dcwloping-Conm,y Debt Cci,i," Sachs and :i;;;.,t,r 1 1 1 1
)Y those dclaults. , ,.I he aut rn,s conclmeJ . Id"c pt:1sis tdesp1c, 1
, 1 I tcn11111c rcco
-vcryratcsc111l
(1987, v,.,.,.,,
II, Clmptec 22) pmsues thc,ncs st,dicd in Suehs (1986, Volmnc II, . t U.S
sovereion defaults. 'I' hcsc g,tJ ' )S .111 know . . . 'SCire "' the 1act c)I'S ' th,tl ( C
C'.

. tl 1 ,
21 ). In this ,nicle S'Chs mul 11,izi,,g, do,,,n.,,,i the '>teem, c,po,ucc or the nine 1,,gcs to'
c t ('111d11100 ISSLIC:, ' , rncd \\'It l \C
hank, lo j"'' fmn co,mtdcs -A,gc,,tin,, B,,.,ii, Me>ico, "nd Ve,,cznela. F,.,,r,e,, "'"'.'\,chs P,om i '"" t ""'""" t hcsc oe ' ' , ,. "e "I so "'"" . . . , 11
I
z . t the !coal,111nc,, s1011 as 1\vc
lhi,d, nr U'
""rnnecei,I lxmk b,drng in Latin Amcci,, eoosiste~ of S<Wcce,gn .".'":'; ;110,1S
the duntion or default cp1sot
Ugo ,Panizza, Fcdcnco . Stu,
lc. s
, ..zc'"e'"'" cc ., ,,,,
I lcromm
xtcndcd. consll
~cttclmcyci
re,"""
. . ,, Prnizza, o . ..zc,, 1""""
" St111 '"' . ",,,,
and I lu1z111ga explore the perverse pohe1cs aimed at keepmg the U.S. banks afloat. I hes " 1
led to inc,casi"g debt-ln-e,po,1 mli,,s "'"' "lso eselie,I i" ceornck,.l,[y high mlbt,o, " . tcct ,, . , . J,
cconom,cs ol default, but l icy, . , , . ,1., 11 J)cbt c1nc LJ:ivcrnOice , Jl)claut 1 ,
cncwcd access ,,tointernat1onc1 II riocs1
I . ] ']Jl10 11 C
' "The Economics and Law cit Sovel tCrt:- 27). They no IC t1Ja 1..I iccclcrat1on . rLIIthcr .C Ja Cirkct
I "0"' """ons poo,c, m "C' e f'f'"'.t to
.. wci 111 C' .
these b<nTnwecs. I". slw,t, t " " po[ ,c. .' " mace P10ys< I
commerc1al banks from their own bad lend111g pohc1cs and to avoid the trnanc1<1l Cd ,
,,ettehneye, (2009, Vohnne II ' Chap . c , They ,eg,., tint I'"
' t11is'.. nocl.,de I t c1p1ta Ill, . , , ..
1 tc1H
th,t widcspce"d conanecci"I bank r,iln,c.s would b,i,,g. tcr I . mmkets "PP"".' to l"'" , , cclcratmg.
"Pla[ . "'"''"' rt " , '1utho1s . c th,m n,,m
,l'mt . y .scholrns .. i"
In "Fiest Wodd Govenanent, "'"' Thi,d Wocld Debt" Bnlow (2002, Volume II, Cln!;i,f l 1e reputat,onal . cxpla11al1on . . ..
r sovereign 111 pcar to l1c, less 1111po . . rnay ' be mo, c m1p01 t,m1
1
23), Jmmy U,.lnw emplrnsizcs the view llrnt fo,eign aid shoe Id he""""""' from debt " ,. , exclusion and rcputat1ona I COi 1sidcrat,ons'
1 suogcst, c1omc.,stic .cos t ,1s1 problem l'dcfou . .
t. lindi,rns
O 1
j J tc1d l icy , c the pcrsIS iblc
Spc" ki eg ha Rngo 11' "' well, B" low w,i Iese "We do "ot w""' b,d i ng to depeml lmgcly_ 'tl ,re .
P1ev1ously
111rnnta1ncc. '
ns ' : . urround1ng ' c; 11
survey j' ClllJlll'IC.l It" Tomz
'
l11 .. if issues s . , . nd va 1u, l O, id l)c au 1
"'" nt,y ' s;n,
I 1"y t,n,sc I''""""
eoens,s , "P"y,nc,,i comm ,tm,,.t mcchmnsm, o, to use
tut
~
, -, ). Linder~tanding the pen um ,l t le .1conc1sc cl ,,-ci"n [)c t ,ll --,ssucs
1 .. l "\ll"C 1
I FI I In'"'"" i on"I Fi "'"'i"I h,sli t,,i inn I r,, nds to sobs id ize ec,rrc,;t brnTnw in g" IP -':,, W . oht prov1c ' I l Sovc c o .. .
0
MiehaelTomzandrviark f ''c 11 ,ict!Rcscarc101 1 yconsidcraw1cc1,l c! ss
1 111(1
Specifically, 13ulow argues against allowing countries to waive foreign immunity and subJ(\ n sovereign debt and de .au It in '" ' mp 1 '8) Jn doing so ' l Jc 1 sovereign 1dc itc( . nc. .' , ,
tl,en,scl,es to the eoert, ol. eccd,to, . ,,at,n,,s
. '" a n,ca,,s of ""'"""'!l. . ned,L. B". JoW. of '"" W,ight (21113, Vol" me II, Cl ''1pter - ""' cl"" 11" J' vc 1o, r Ihe cc l,t 11,n,,s . I ,ps 1ct,,cc
' . 1 . "" 11h
, ccn ,n ""'"1,Hio., woe Id make honowi ng nati o,,s seccae C<ed it lx,scd o" the q "" ,tY ,ts includ1ng . the size o! . sovereign debt . as an'
r11cy also co11s1 ,ctcr. solllc1tions,
0
addrcssi . no "" questions
I . I (!0111cstic
. . .
mst1tut1ons . t I1c1r
111 . own countncs.
. In part1cu. Iar, t I1e borrowers would have to cIeve,JoJJ 1coll Vanat1on' in the costs ol [10110 .. WIil".
c . . in the [ioll( .. 1w1ne- lh , tic ere( I'1trns. . ,'/ W IIL l
that wmdd nrnke le,.de,s willieg to c,te,.,I e>cdit. of . . ,. 1I 1nst1lut10ns . r, or dolllcs
sovereign debt and the politic'. .' . , tc .1.,ainst 0 1 cl\. lt' o \'olume
The two lio"I ,,.tieles in this ['Ort foces '"' the delhult ie A,ge,,tioa that begrn, al the "'' , 1 .. [)
's. o debtor govcrnn1cn 1s t l1scnmmc1 ' l hich 'c
lavoi dclau 1
t'n 1ncl \',rn tura .( 2111 t'' cs One
2tt0 t -2002 "'"' ['Ccsist, sti I[ in 20 I 6, with no si ,,, o limm i,,cot ceso lutioo. In "A,gc,H i"" ;,, ,
t:onst,tuencies want to hono,. t!cbt all{ w.1. ts" Bronc,, , Mar .1 , ' unt ' o I. t c,r,' ult 111ccn. ,1', Iby the
0 1 .1as pcrccf\ et .
A c,.scI or Gnwnaneot foil ms" Mcit,e, (2003, Voln m, II, Chaptcc 24), Me[ Im, wd Ii ng20 s"'.., " Sn,,..,.
, .g" R" . k ,md Sccnrn . , . lary Mai ,c .
. . ts , "'"' . 111011 acct 1
.. " '"'" "
,1 .. ,,
. . . . 1 I . . , ;\ . ' .
a Iler t 1c 1111t1at1on o l 1c cns1s, says: ' rgent1na s ma111 problem f'or decades has Jccn a l JJo!Itic, l II 'Chapter
, , . , . ,\I , id . then 1c_1cc. I , osts vc1st. t'ons arc too ,,c, ,.
1 29) charactcnzcs , . l'ocuscs on t 1c c .I . uoh trade sane I ... this nce.lccts
system llx,t c,ua,01 "'"""""' . . c,c,hhlc, . pm-g,ow1h, no,.inlhtin,.,.y policies. Ii has not Jep '. le Lis0 I . . I' It 111ccnt1vcs lt1cs t 110 c . I Vc11tu1,1 .
Lia cxplanat1011 ol de au .1. I hull pcna ' ,. !Vlart111, ant . . inssi,cly
promises to the !Mt: and other international lenders. Without political reform, there is J,tt)'i s . . . , .. iunt, 1 tc' . Bronc1. . "tlhcr t 1,u ' .
vere1gn debtor. On tl11s ,ice( . 1 ;\ -cording to . . !Jicd bo1H1s .'' l1l ..1 sell their
,.,w
rrn,p,ct th"1 I I pm,.nses . w, ". 11 l I<cpl " lr..~,OJ. h,iieed, A,gentin, dclO,.hcxl "g"m " 1 .. 0( -s
~
ll ie soverciLJ:n is lllorc likely ' ii'lul.
tot c , Ii, s will sell tic C I 1rt10LI ll
the cxterna ion I I I rs then use dho(CIS.
7
Me Itzcc c,n,c '" es w,t I, " pcssmust ,e ,.,w ''"I " ,t,,,. n,eg h,ct,
cspee,a lly co,,s,.[c,rng
tl ''1! he. ,. tl10le Possibility that cxtcrna t t Icbtho (cl hct they'irouc. "" . It The dome.stic HJ ( c
wd1ing withi" 24 "'"'"'" """ the defoolt "The foci that nrne llum 2 pecceot or the pope I""" 1 I I .
ding thern until the dclau l
. It iccurs. In ' ,
. tint is abou t
t t i dclau ,
. . tudyinLJ: till'
has left,
Acge"
. or Ims app 1Ict I 1or visas,
Ii""
. t Iranwt1ca
. 11 y I1 lustratcs what !\r~ent111cans
, tc. Unll
ant1c1pc1
",.,Jc,i,.k,., """"" '""t"I pnlitie" I ",,., eco,.om ie "i<,nn, i[ wiII "ot pmspd' (P 3 ). n
1 l)onds lo domestic parties . in
. Iucc
. tic I , n 1' t I o 11 , . ion
, , the
' to pay. I s a Jabora t O rv. Io I . s vhich is the
tl lcir
,1 1Pol1t1cal
.. power to Ill( , sov1;1c"' , . iun dctau , Its prov1cc. , , il'sovcrcrgn_ , dclau . 1.ls,\.Hl Times "" !
""""' io A"","' llnmo, ia "The F" ii""
or Deht-ll,.se<[ Development Lessons ,o"
1
1
-
le long and nch history
. . . . ol sovc1c -
, nd the occt
.. irrcncc l
c. iuntncs c' . I) hull 111 '
13 -+ Torn; alll
Acgeotirn," llnuu, 121111(,, Volume II, Cirnpte, 25), w,ites that the ,cpeated ll,i[,.,e, olhg,,,t:\ n:I
0 1. I conomy ,1 I . i "Do ( I :,po to - . .
at,onship between the rca c W11..,ht stuc Y 11 . lita from ' - . 700. corrclation1
to P"Y its ilchts cues [,,,ck to Ihe d"Y' of its Ii bc,,,i io" lion, Spoi", wi ih its ficst of m,m Ydclae t, t , . .. , I [VJ1rk c ') U~Illg '' .. 11 v IIm '
P c that M1clrncl I ornz dill ' 11 ('liiiitcr 31, t tiuntnc~. ic. J 1 1-,,itl rrcqucnt
oec,,c<i "g i" I 824 B,,,no theo ""'"" o" the elfo,t, of cccd i toes to ""'"" A,ge,.,i "" lo P"Y \ 'I'on1:,: and Wrinht (2007, Vo Ium e . , It.. 'by I ()(J (I.IITcrcn tc I towcvcr. tic. I v '1 .so, it that many
0 1
its debts since 2002, all ol'which have been unsuccessful. Bruno ascribes Argentina's dcepes W1rig . I1l build a ,..,database o 1 - ,")() dcfau s v cconolllIc outpu, . They a Iso documc1
problems to the repeated failures of its political class. h,~ Wecn the occurrence ol (1,1: c dl iltam. 1.10\ " relative ly we
11
d-1:c <ttilts when ccono1rnes . wc,'"c 11erlrnm1n:::,
 ------ -------- -

x/iv
The 1:co110111ic.1 o/Sovereign Deht I . o1 ',01ereiu11 Dehl I
The t:co1101111cs L .~

nations
. avo1c
. I cIetauit
, even w I1en tI1eir. econonnes . su 11er senous
- ,s. On the whole,
aciverses-110c I ur Volume II I .
as Toniz and Wright point out, these irregularities constitute a continuing challenge to 0
,mdmt""'; "g o I'; "ternat; ona I dehL . . . ,, .. -down" . I Smac1g11 J Relic:.1
. l) c,ft
l
Part 1 Th(' Conunclrum o 'f''OIL''i"n Aid a!1{ -, fthc internationa
If'Jllanc'
'id
Edwmd Altmao and I k,be,t Ru ken dcstmgocsh bet wee "hottom-p """ .top .,,..,it h .

assessments of sovereign risk in "'Toward a Bottom-Up Approach to Assessing Sovereign Des at . d ,r, its 1re a comn1011 lea tut erIFls o such as tIle, World Bank .
R;sk" Altman nml Rljken (2011, Volume II, Chapte, 31). A top-down apprnach "'.~~;c, l\s the world has seen, sovereign e dU , ' 1the establishment O
. W 01-I I War II am . e to less
_, ,'
we
II-developed nations
. l ,,.
tnacroeconomic !'actors such as GDP growth, debt-to-GDP ratios, and export-to-debt. s_~ 1that landsca1Jc. Since the encl of c . , ciffered ass1stanc . . Iiavc occasion }CCI
nd, t1ons 1,ave . t rvent1ons , 011 . ,1
ratios.
h As the title of' their article implies, Altman and Rijken fovor a bottom-up appro,ic 1 .eve and the IMF wealthier Western . ., 1 iises. These 111 e . . . , s the West has given
'
as they confront debt problems <1m . , I lmanctd c
. , trusivc. In mc1i 1 . , y rnst,mcc., , . d being com 1llot1<1. I .
egms. by exammmg . . tI1e smm dness ancI pro f'Jta h1 1 1ty of a nation
's pnvate
sec tor. They be 1,1 it
. , , I been quite m .. with tie di consider . 1
that bottom-up insights provide a uscfi.d additional tool fix understanding the likelihood of'defau . n1ass1ve and they have frequent Y , their economies, . 1
. . irt the, Ieve,1 '
. ' .
advice on how aid rec1p1ents s iou . . . I Id manage .
t. dvicc. The arttc e. 1 ,
. I s n t 111s p,
'reion debt rel1e . . ,f'
I In Ia ldebt default, investors suffer losses characterized as haircuts -the percentage Ios'S~bt () 1 1
t ,c mt ' s <>et 1'<eseo t vocce.I I " ''I-Ia<eets,
. J',st,o"'tmg
l"vesto, Losses m ,Sove1ign
" .De
3'), on the recipient nation's ad I1ercnce to t ld d . , of' f'ore1gn . ate. I '111d. sove . }t' "" 'issistancc . "Who
Restructurings, 1998-2005" Sturzenegger and Zettelmeyer (2008, Volume II, Chapter ,, ,frequency, performance, and po 1t' I ic,
"11 purpose
111e the flows an( I mot1vallon
0(1(1 \lolumc c ' Ill, Chap , 111 t', c1. I):
0
the """"'~ """ <ne S<, sovern,go dch<c< , Its that occu o,d from 1998 lo 2005. ,fhcy est on, . 'ltetW ,.Albccto Al,v;n,umd Dav J ]) 1hr cxdm 1hr (2 ' I l t -chef.
1, ' ,,,, Ales;oaand Do ' I ,.,s;stm<eel;~d t< ".'.
haircuts that investors su11ered and the percentage ol'the outstandinu principal that inveS OI Cnvcs Foreign Aid to Whom and Why. ,, l roadiy, not me1 e y . , tion of donor n,illons.
t , , T1 aid. mo1c } the bac kgi-ot tnd, moll . (I' -cctly
were
I ult11nateiy
. able to recover--the recovery value. The authors find o a tremendous ran , gc IIle1 Alesina and Dollar consider . foretgt. t, - to ti Ydin of assistance
o f' Irn1rcuts,
f'rom 1.,,., to a Imost 75 percent. Further, they report cons iderab I b l 111s1g 11 s 111 1d func ( . ,11llcms..
l 1e seventy 1In doing so, they provide va ua e . tl _, motivation aI . , I, ve diverse mot1vc1_
v,.,;at,;i;ty ;, cceovecy valoc nmg;,g from rnoghly 30 to 75 pccecot. II 1 lls
provides a context for uncJcrstandmg , , ieenl that (Iono r naltons .. .1'iner colon1cs. . s n11 lariy,
. . l I,. , They docum " .. I to thc11 1 011 . , , . thors 1 argue,
I o "Sove,,; go De Ian ltsc The Pciee o I' Ha ;,rnts" C rnce, o nd 1,ehesch (2013, Volum'. ; tied to sovereign debt pro} ems. 1 to offer dt_c . . , tries. I h1.: ,lll . .
Chapter 33), Juan Cruccs and Christoph Trebesch extt:nd the analysis of' the costs of' d~f_au 1 hlr, instance former colon1a I po wcrs .tem, non-dcmocic1 ., tmng . , cout . g1 is dictatecl l Y Pl ll1t1ca
bborne by bond investors and also assess the costs imposed upon defaulting borrowers. r h~Y
'
1dernocratizing countncs receive
, . 1110 re 'ud t11,lll , t the pattern f' ud g1v1n ' 1 1
11
egm. l}Y notmg
. tI1at many previous . . have found
studies , . I( IY egatn.
that defaulting countries qu1c 11 sum: "We find considerable evtc 1cncct d , "ovcrnmcnts Wt11wc1, .'
1 1

access to mternatJona l capita l markets and pay little extra for subsequent debt. ( O nc1 clca , andI strategic considerat1ons . " ( P 33) , , cial problems, clftcn . have . nlo values. Alllet-t Aics111a
1
. to tI.11s genera I'1ty .1s s turzenegger and Zettelmeyer (2008, Volume 11, ('l, ',ptCI
exception _.. 0 >oorer nations . . debt ancJ c1thcr. t111,rn
with -e'J}Ulations 111 . rostenng L s1I11:orcign
ie ' Ate . J?"
Alcsina
O
am t
1 5ter1mg 1 1
32.) Cruces and Trebesch build a database or dcf'aults covering 180 defaults across (18 countrJe:
1

P Iit1ca! institutions and less t <1n I , , nmcnts Rccei ,vc cs. roadly, but a so . I. turn to (_c1.1,
01 1
covering the years I 970-20 I0. They find that high haircuts are associated with highet . Beatrice Weder ask "Do (' TUJ)t Govet
<Ind TI y consider t'oic . i<>n
O
(11(111 ,ovcrnmcnts tc . cc1ve lllOIC .
subsequent borrowing costs and longer periods or capital market exclusion. _. Weder (2002, Volume Ill, Chapter 2). 1~ ,nee ~hat less corru'.} ~car committed to fostcnnlg 1
M; gcl Fcc>tes m,d o;ego :'""v;.,
also Ii <ol that sovcc,; gn de rau ltccs pay lo, the;, dcfo ".~ 10,1,,
re .,
tef 111ore s1)cc1ficaliy. They , f'II id no cvic e , dono1_11ci. 1t( rns do c1p1 lillcal . , . !crat1011s. In
cons1(
"t least to some c>tcot, o, "Sovccccgo Dcraltecs, Do lotecnat;, ,1 Cap;tal Mmkets """." ,I rc1gn . aid or. more generous de,t}t te -lief.. Some, nost exclusive .. , "--in which a"1 ~lf'all, sue i
. ,Jy by po .
0
Them'!'" Fuentes "<>cl s,. ">via (20 I II, Volo me II, Cho ptcc 34 ). They locos pci,,c;p,d ly oo >, ,1 . _ Jnven ,1 11 effect 111_,K
iberal values while others seem c - t' . the ''voracity ,J vin!.!. of' growl l. . . I . t
llows """ defr<c<lt. They li<I that FDI llows from cc,d;to, nat;ons tn the defrrnlte< dee Im,
0
add1t1on, , . Alesina ' and Weder frnc . I tppotst
, l 101. distnbutwn . . c1. nd a s,,m-,f' concerns tic.. ~ 1
I , stnnos t 1,i
, t
m<<ekc,lly, The ,,dct;nn ;s stnmge, fo, frec1oenlly defonlfo,g <nfr,ms, aod the elfrel ;, '"".' as () , ,
1orcign aid or debt relief, ieac s o , 1 f'orcion I' t f1sca tc
O
.
aid all( I cJcbl 1c 1 tc
!itiono!ifl' as an in lnnocmcn
b

"'. I tly
intense
their FDIimmediately after the defoult. By contrast, non-creditor nations do not seem to reS flCl
flows to defaulters. ne of'thc most contcnt1ous , ,L . SJJects . . o , tions views uch cone . . 1roue that tit: I 'Y arc . ng 1ii .
t
,coinc
I With that assistance. Many te -,c1p1cnt nd
. stitutions an( I natt0ns ' ""
, .. , Burnside all( ' I l)w1d Do. I,u,
As we h'Vc seen, ; r de fan It; ng ""t ;,ms hc,n no co.sts, then oodecvta o<hng the pm;stcncc '.' 1 , . -
o sovereignty. On the other ,am, I I donor Ill,t they prov1c . . ,,. that mot1vc1 c . . . .t icI
. le c_ t ,ug . , l , donors,
sovereign lcnd111g becomes very dil'ficult. Exclusion from capital markets might be one co L
5
,concerned with the proper use, o r tl1e suppot v1sion of, atd. . t I1c, pol1ci1.:s 11 growth .Jll .. /\1(, I 1'oltc1es, . II '111(1id
and a second could he paying higher post-default yields when the borrower regains access t, ,exp1Iore the connection between , the pro , ,fleets that ,ell( I has ,O l) They f111( , tl 'it ' ovcta. . , ' to
rnp;tI "'"<kets. lcdn,.,do Yeya,; and llgo Panb.,. nddccvs what they call "The Elc,v;ve Co< '. beI10dYtor. . of , rec111ient
. . governrnen . , t,s, and t,, 11e e
ltirne II I, Cl1apter . ., .enl rule 1s . 1. tI1i,i, t aid given
t 0
of'Sovercign Defoults" Yeyati and Panizza (201 J, Volume II, Chapter 35). The authors note C'J Wth" Burnside and Doll,u , - (2000,
- .
xce11t1on 10 this -f!.CI 1 '
ic rowt J _ . ..
that thee, ;s" eonclnfroo hetweeo delonlt acol ,edoecd ecnnom;e gmwth hascd on anmrnl dnW Iloes little lo foster
g . , . one c, . 1 . t, cconl 1111 "'0 . .,1 MF J>roe:iams.
~
e:rowth. llm_ve~ct, 11ts docs strmu ,1 cd ly the !MF 111 I ('I ~t"r 4).
but they wish lo f'ocus on a finer-grained approach using data of' a hi<>her frequency. ContratY
I
overn111ents with 0uooci policy en vironmc
L ,
I the loans g1,111te (2(1(1-i 1
Volume, II I ' . iap I , . not
to expectations, Yeyati and l'anizza find reduced economic growth before defaults. After e
th ~
,,obert B'1rro md Jong-W 11d, J ce .,stuc Y,1,, 13,11-ro .,uHt Lee. irthcr JM 1: Jcnd1ng c ocs , ..
: '
del'ault, the events arc quite otherwise: "In particular, we show that dcf'aults have no significant
negative impact on successive output growth and, if'anything, mark the final stage of the crisis
WIlo Is Chosen , , What Are tIl e Eftects.111c growth,
and ~ ' 1
t hey fin(.111110t or 1nte1 . - , tional openness.
n,1 I i1 11w
and the beginning of economic recovery" (p. 95). Th1 e granting of' !MF loans reduces, ccono1 . oovcnuncnta I spcnc Jcmocracy o' all(I tl ic, ru c ( '
h-'Ye 111uch effect on invcstmcn t' inflation,ii b eoat1ve . _ e!Teet on c
p, _ . , , sma 11 0
civcrsc!y, IMF lending does have '1
 . ----~-~------------ .-- ------.-

TJ,c L'rn110111ics ,!fS01creig11 Dehl I

T/ic Fe
, ,JI/ o1111cs
of So1c1"<.'ig11 /)chi I

Interesting! Y, Bmro and . Lee also sh , I , . .. - by the !MF. This docs not mean, however, that Rajan finds the Fund to be beyond criticism.
burcrncr
,.' c1cy, ,c1nc . lo donor nations lcld. ( w tt ldt ,the . closcn,. css" O 1 !he recipient . nation to the IM'F "Institutional Reform and Sovereign Debt Crises" Rajan (2005, Volume 111, Chapter 9),
1
Since 1970 lll" 1,.11 ,. . ' s O 1<11gcr loans. considers the kinds orrcrorm that would address the troubling aspects or the Fulld's bchavior.
, L iv 1i1s J)rn l I 1 .
except
. Bot.sw<1nc1, . , Kuwait, . ''and Mihy VI( ec ..1nanc1al ,> A .
support to ,llniost , every dcvclopin"2 country, One or the most problematic aspects or a crisis ror the Fund is idcnti rying the underlying nature
rich to. poor int' . wi .
' ions, 1 !tarn Lastcrly is!. "fl ' ' sic1. gains! this b
. . de ,giound + . ol .massive lcndmr; . .
lroi11 of'a crisis in real time. ls the crisis merely one ol'transicnt illiquidity, one ol'solvcncy, or one
I lcavtly
, I I ,1 ,
m c )led? Rcv1cwinf': Two D," ,. ,. ' ,s ow Did fl" 1
e,lVJ Y Indebted l'oor Countries Bcconie - ol'illiquidity that could cause a nation to become insolvent'! The role or the !Ml:, if any, should
Chapter~) 1:, . ~ ccM1cs ol Debt R ,J f" , I differ in each kind of crisis. As Rajan discusses, the kind or crisis being experienced olicn can
>e_. 1~1 . ~c1stcr 1y locuscs on those natio11s ! .. 1 c IC tasterly (2002, Volume II '
(II Il s) ' \)OJI 1t mg out that this chssili" t' c ,1ss11cd ,1
's . "II cavily Indebted Poor Countries ,,
.
be known only tdlcr the crisis has passed.
paradox
t or d ,[ t ,
c) re 1icl, accordinu tu Fistcrl .. ' ' c,i ion arose 1f'tc. 1 1wcnty years or debt relief. The bitter
wcntyycarsortltIIIPl'
,t I l .. c rel1cl. ,"'pro<>rn111 ,, 1sY,tl 1s11attheHIPC
,
1
. s were as heavily indebted a -,.
1
tel !'cm ff 7hl' f:'11m::.011e Soreffign !)eh! Crisis
tl lei, .. ( c. )! ratios
. I , , . , ,
t<1vc ,ictu,tlly beconw v . , , "'' ' icy were at t. , ,
Is 111ccpl1on. Ovcra!L Easterly notes ,.
l)ccc1usc o I the ex)' I ,msion . of . oll1c1al " . lend'voi sc ,, (c111d that tit c, .. ... 1_Ill , ( ,s , debt crisis . . dcvelopct ,1 By most accounts, the Eurozonc sovereign debt crisis began in Iceland in 200X and exp,rntlcd
l) ocs debt relic!' bri11g h
enc f'1ls tint lllg p. 1692) 11 into Greece, Ireland, and Portugal in 2009. Whatever the exact date or its initiation, the crisis
reduce wclrarc'? S, .,.. . . . . . , outweigh costs or I , . , . , . I persists into 20 I(J and threatens to continue into the indefinite future. Roubini and Sachs
Rcli I' Ell' . et ,<111 A1sl,111alp and Peter "I . ll ( ocs debt rcl1cf distort markets ant
c ' 1c1cnt''" A. I . 0
air - cnry , J l , lt examine the foundation of' the crisis in "Government Spending and Budge! [)elicits in the
issue l 1 , .. 's ,HMlp and Henry (200S V I Jc ( Jess these questions in ""Is [)c 1
)y ocus1n" on th, -, o ume Ill ('I 111 Industrial Countries" Rouhini and Sachs ( 1989, Volume Ill, Chapter 10). The authors note
", t . "' c Sloe,1 market i11 tl , . . ' iapter 6). They ex11n1nc l s
\ivcs et 11- 1)'tscd , . le rec1p 1, t ' the large increase in government spending and dclicils in the 1970s among the countries that
a"rccmc11t' . ,commerc1al banks. The authors t I cnl nation and the stock prices of large,
o s wit 1 pnvit, , . d ,e t 1e J( , 1 ,j would eventually form the Eurozonc. Part or the rise in deficits and indebtedness stemmed
Sccrctl , .. ' c crec1ilors under the .1 .. , , J ll<1tio11s that reached debt re JC
,tyo 1 t1e 1 lrcast N' ,usp1ccs of tl, B , S lhm1 cyclical downturns in the real economy. After all, every country experiences economic
countries is tl , .. II y, icholas Brady. The I (i I . 1 - le t ddy Plan, named al tcr U..
ol'liciil - ' le cx1stcncc
- 0
r 11
icir national sloe\ ld !Oils we,,. II
.
tc d 1111ddlc-mcomc dcvclop1ngr cycles. But the authors idcntily what they sec as a deeper problem. Par! ol' the rise in
' ,111 nounccment ol' tl ' mar 1,cts , Il , I indebtedness is due to the political structure in these countries. They argue that "weak and
hy more tJ , (i() . ic Brady Plan, the Sl(Jc] . vou c imply. In a111ici1x1tion of l ic
1'111 percent F , . ' 111 ar,cts1 rtl,. ,! divided governments ... have been less cf'lcctivc in reducing the budget dclicit than have s!:iblc
Arslana!J) 'lll(l 11 f' . ocus1ng on the 11 co111111 1 . I l . o le iec1p1c11t nations apprcc1ntet
, cnry Ill I . c c1a )'l I . 1 . ,md majority-party governments" ( p. I 02 ).
This .. , I . t c1n average sloe! I .,, . 'n ,s w11 l the larucst LOC CXJ1llsures,
. Wds cl c11gc wealth ff,, . ' )t ice increase or 1- , , "' . Azzirnonti, de Francisco, and Quadrini also note the longstanding trend among developed
debtors and b . W . e cct, gc11crat111g 011 the 01. ,. , ) pc, cent over the same period,
,m 1,s. 111 le th, , tl . ( 1ci of at le1 t ~s . I1e nations ror debt to increase in "Financial Globalization, Inequality, and the Rising Public Debt"
bcnclits were , , . , , c c1u iors view the rcs It . , . 's ,D 5 bil !ton Ill gams by t
11
,c11cvc( alllong 111 . .u sc1sasuccc I . I,., Azzimonti, de Francisco, and Quadrini (2014, Volume Ill, Chapter 11). They analyzc the
cou_ntrics that le t 1. llll( c c-mcolllc cou t ,., ss, t icy emphasize that 1ws_c
Ill o ic1vc ,vc I , . . . n 11cs ,111d m1 I , r concornitant liberalization ol'financial markets and the trend toward greater worldwide financial
lcdcrico S!t .. ,I 1
.
c1 ,ci 111st1tutions 'Y not 1c translcrablc to pooic
. 11 zcncggcr and Jcr . . .. integration. At the same time, inequality within developed nations has expanded (even as the
that occurred liom I lJlJX t ' _oin111 l'.cttchncycr l'ocu, ,. , . . inequality between developed and developing nations has l~dlcn). The authors lind that thcsc
Decade or s . . 0 _()()) 111 "Creditors' L son debt dclaults and rcstruc!unngs
t1vc1c1gn Debt (, , .osses v, ... [) . twin l:.1ctors or increasing inequality within richer nations and linancial liberalization ca11
Chapter 7) Tlic l :. . rises' Sturzeneoo ctsus cbt Relief': Results rroJll"
II account for at least part or the increase in developed country debt levels.
Uruguay TI .. ,
)011ow111" ,
, 6 llc1tions were R .. ,
,.,,.,er and Zett I
. ~ c meyer (2007 Volu111c I ' Viral Acharya, ltamar Drechsler, and Philipp Schnabl find an inlcrcsting and distressing loop
. . lesc losses lor i , . uss1<1, Ukraine P I .. t, . ' I
government rullcl. . . nvcslors came about 1 . ' cl <IS dn, Lcuador, Ar(.;cntina, ant
. . , s 111vo 1vcd TI,, . ll 1cstructur ,. . ~ 1 in their study or the sovereign debt market:"/\ Pyrrhic Victory' 1 Bank Bailouts and Sovereign
s1gml1cnnt loss"s .. . , le dllthors frnd tli t . mgs, so there were llO crcd1to Credit Risk" Acharya, Drechsler, and Schnabl (2014, Volume 111, Chapll'r 12). In their
~. 1,rngmg In ,1 investors . . .
gave lo debtors wts I.'.. 1' llll 13. to 75 percent ol'tl ,.. , in sovereign debt suffered vc1Y analysis the linancial sector foils into distress, which induces a government bailout. l lowcvcr.
'. css 1 Jail th, IO II ic11 invcstm, t 'J'J . , I 1..
a Itcrnative cxiil . . . cl nr loss or in 1 , . t 1 , en 1c dollar debt relief t 1 s the cost or the bailout increases sovereign credit risk. This heightened risk now weakens the
.. dllc1t1011s forth. I. \CS o s. Sturzell, r r . J1
I he typical so , . , is we larc-rcducino , cggei Hild Zc!telmcycr cons1c ~ financial sector, which reduces the value or the government guarantees just received. The
. , . vc1c1gll debt dcF . "'outcome.
'.tll clamor111g, lo be repaid mor, dtdt dlld restructuring usual I i . .. authors explore this issue both thcorclically and empirically using data liom credit dcli1ult
,drnost always !I , . , c lully than others It .. , . Y nvolvcs a number of'crcd1to1s, sw,1ps. They argue that this account pertains to the experience or Luropcan sovereigns and
, 1Clllost\1J'clcr,{ .. 1sc1J1ttJc1) . a', 1
crcc I1tors. The wis l !Cl creditor comii 1 'I prcc1atcd fact that the IMI ~
.,omn11dlcgd't1 O . . ' ig a1cad ol'l)' 1 J banks in 2008.
lilll Ier Intcnntilln' . . ' Y 1 this preced, , . c111 ,s and other commcrc1n Greece and Italy both had a pre-Lurozone history or high inllation. ;\t'tcr joining thc curn,
' d 11 .aw: I he C . , , Cllcc ts the lo . , ,._ > , . .
111, Chapter 8) WI 1, I ,1sc ol the lntcrna1ion1! 'J pie ol I re Ierred Creditor Statll~ however, their inllation rates fell. At the same time, they began to increase their levels ol'
ll c t 1e !lrcc . I , , ' iv onct1ry F l" 1,
notes that comn ... , . cc cnce ol the JM F , 1 ' . un, Martha ( 1990 Volun e sovereign indebtedness. This is the topic that Aguiar, Amador, h1rhi, and C,opinath, examine
ic1c1,1 1 creditors I, . n1c1y iave littl, . . ' .
Raghuram R11 . 1c1vc acquiesced 111 tl. c solid lef';al standino Marthd in "Sovereign Debt Booms in Monetary Unions" Aguiar, Amador, Farhi, and (;opinath
.. . , . cJn notes that I , . lis de l'a t . .. ~ o'
m,1111t,1Jlls that 11 . , . . . t Jc IM! has suff,., I , . co ,1t1angcmcnt. (2014, \'olume Ill, Chapter 13). As they explain the rnallcr, (ircccc and Italy secured a nc\\'
ICIC IS d r;cnu1n ' I !or
' an instittit CIC( consider l1 1 ' ' '
~ e nee( >
d c cr1t1c1sm Nonc!hclcss, hC
1011 lo f'ullill 1 , , l
nost ol the functions excrc1sct
 _.,,

x/i.r
xlviii The /:'co110111ics of'So1creig11 [)eht I
Tl,e t'rn 11 01111 .. ..
, c.1 0 1 SOl'l!l'e/gn Deht J
mflation credibility b . , . th provides a wake-up call to examine other countries, which turn out to have similar problems
the level th, y Jommg c curo. This credibilit , II d
c market would lnvc t(ile , t Yd owed them to issue new debt beyon that were also previously underappreciated.
In "'F.," 1 ' rd ecI under tl I 1
, . isc.i Policy and the Future or tl , 1: " ie c ldc ima and the lira.
[,c1u1cncc K 0 tl'l1<0 f"I begins with . b i 1e . -Uro Kotlilrn f't' ( 2004, Volume III Cha11ter 14) ' !'ell'/ Ill The United States 7/Jclm crnd the Future of'the lnc/11stria!i::cd Nations
member counti,ies arc cl,fcctivcly , '1 0 Ic stc1temcnt
bankruJ)t" ( "TIle, Unit.cd
States and most ' or the euro-
Monctary Uni 011 s ovcrc1gn debt constit t p. 5 I) He '1ls 0 prec1Jets the demise ofthe Europeai1 In recent years, the surge of' debt ratios in the United States and other industrialized nations
tliese
l countries 011 I( ol 11kofl--, s account u1-1 es only the kcr ne I O f',c1ctual , . . , fir
. obligat1ons
sovereign
0
continues to generate concern. Carmen Reinhart and Kenneth Rogo!T examine whether
c1e it, the totality 0 r w 111c 1 COl11/Yti'cl to, . owcver
, ' there 'ir,cot 11er liabilities
. ,n
l1es1clcs sovcreig sovereign debt burdens could impede economic growth in their article "Growth in a Time or
1
prcsc1 t , I ' ~ dsscts c ,
, I. l Yd uc of the central government', , : onst1tutcs the "fiscal gap." The fiscal gap is the
Debt" Reinhart and Rogoff (2010, Volume I I I, Chapter 19). lixa111i11ing a larger number ol'
. Isovereign
,me . c1,1
e 1t o bi'igat1011s . minus tl1e s spend111g
. , on , I.s, services
. gooc . and ll"lnsfer 1Jayments,, countries over two centuries led them to two stark conclusions. First, for industrialized
c1nays1s Kit\'! ri
tl , , ' . c 1,o forecasts extreme infl t' p1escntvil, ' uc d future tax receipts.' In his trenchant
O r,11 ' countries, public debt levels above approximately 90 percent or (iDP were associated with a
lewit
curo, like the co I IIc1i,. 1.sa ,, s1nk111gshi[)"
. . d
1011 to addrcs tl 11, . I, t reduction in economic growth or I percent ol' GDP or 111orc. Second. ror emerging nations,
.s spioblem,andhealsoassertst1<l
11 c Kotlikoff (200 4 Vo! total external debt in excess or about (10 percent of' GDP was correlated with a reduction in
and U.S sitll'1t' . ' ume Ill, Chapter 14) r , GDP growth of'about 2 percent. Once the external dcbl of emerging nations reached about l)(l
E . , ' '. ions, .Jerome Stein cmpha .. , . . "ocuscs on the uniformity or the Eurozone
u1 opcan nations in ""f'I c, D1vers1ty . . 1
'I . 1 of'sizesD btic d1tlere11,,,
.
,
ces c1mong .
cnscs ,
faced . . . j ua 1
by 111d1v1c percent or GDP, rates of economic growth were cut approximately in half'. 1:or both
( . Mpter IS) l3 ,r . . e t Cns '' . E I industrialized and emerging nations, safe levels or debt did not appear to harm growth, but
constitute tl:c .co c o1 c examining the di!Tcrenccs. e~ ,in ,uropc" Stein (2011, Volume II '
were clL , I . I mmon core of'thcsc diverse c . , , .stem '.tcknowlcdgcs that bud12:ct deficits there appeared to be the threshold effects just enumerated. This article by Reinhart and Rog.oil
1c ,ugeytotl
, le, 1iousmg , sector l'y . nses.hirSt, ein, lie 1 problems Ill . Irchnd~ rnd Sp,un , garnered a great deal or attention, and the results were taken by many public intellectuals and
, Itnmec
Stcl ro t.
"TII ,f F111 s t uctural ddieits. ' contrist tI
'. , ic matn problems in Greece and Portug:1 I ' ' politicians as being highly relevant to the contentious debate in the United States about
1 ic -Uropcan Soverci 'n , .. seemingly endless deficits and the undeniably expanding U.S. federal debt.
Lane maintains th, , ., g Debt Cns1s" Lane (20 .. However, three graduate students working on a project to replicate the work or Reinhart
structure tl11t I I c co1e sovereign debt proble 12, Volume III, Chapter 16), Pl11l1p
and Rogoff (20 I O, Volume II I, Chapter I 9) discovered a computational error that appeared
' ac U <s. '1 ln< 11 trnig
union . and a _,:; m rests o tlie ll awed design or the euro, '1
11
Eurozonc tli, 11 ' 11 c 11 ropcan
' c n1tcd St t b ff I' to largely vitiate the link between growth and debt. Thomas I lcrndon. Michael /\sh, and Robert1
provided by tl , . d cs possesses the C(llll. . .u er mechanisms. Compared tot ,e
crisis due to sl
1c 1cc1era! go ,
ver.nment. Lane sees 1 1 f'f'
1nc11t-w1d, r
c urn orrn governmental structur
e l'ollin published their results in "Docs I ligh Public Debt Consistently Stille Economic (irowth'
ow growtl 1 ' c t 1cult 11 ,1 A Critique of' Reinhart and Rogoff" Herndon, Ash, and Pollin (20 I 4, Volume 111, Chapter
di f'ficultics i11 1 . 1 . 1 Ill t iese mature ccJ t . rospcct for resolving the Europec11
mp emcnt 111 , tl , . un 11es a c , .. . t 20). For example, in one key result Reinhart and Rogoff (2010, Volume III, Chapter 19)
most or the I " . . g le techniques off , . ' ontcnlious p0Itt1cal env1ron111en'
lcdv1 1y mdebt, 1 111d11c1al rci1r,., fi computed that countries with debt lo GDP above 90 percent experienced growth or 0.1 percent.
At the 189( I), . cc member nation. ess1on, and large risk premiums ot
. , i emocratic N1ti , , s. whereas the correction in I lcrndon, Ash and Pollin (2014, Volume I 11, Chapter 20) showed
his famous "cross or I " ' o11c1l Convention in Cl . " .. that the result should have been growth or i 2.2 percent. Taking account or the computational
standard Kcv O'I god speech in whicl1 I , I u_c,1go, W!ll1am Jennings Bryan delivered
111 Zourk, . ic c ccncd tl , ~ Id errors in Reinhart and Rogoff (2010, Volume II I, Chapter 19) led I lcrndon, /\sh, and l'oll in
speech spccificall ) . .. , c ,llld Alan Taylor inv 0 1 , . ic monetaiy strictures or the go to conclude that their work" ... has established that policy makers c,tnnot defend austerity
Y 111 Cross 0 11 <e 1 met1pl
t11s ( 1 tl1e
17 ). For O'P,Olli.1<e and T I .:uros" O'I'
,ourke and T I
' 10r wit 10ut mcntionli1"O
measures on the grounds that public debt levels greater than l)(l'1/,, or CiDI' will consistently
a single monet1ry t l,1y or, the very diverse r11t f' ,ty or (2013, Volume III, ChaptcI
' sancard tl 'ionso the!:.. b" produce sharp declines in economic growth" (p. 278).
member countri,. r: . ldt cannot be suit l 1, 1 . -lit ozone arc bound togcthc1 ;
The flaws in Reinhart and Rogoff(20IO, Volume Ill, Chapter 19) and their discovery by
, " cs. ,u1oped ,. d) e or the v \'tl' . te 1
c1nd su1 fcrs f,- , . . ocs not constitute 1 .. ci Y c I crent econom1es of t Herndon, Ash, and Pollin (2014, Volume 111, Chapter 20) generated a storm or controversy
. 011 1 ,\ 1c 1al!vcly k , anyt 1111g appn , ,11111 . ,
1s to be one witt . , . wca fiscal center . ),le g an optimal currency area as the public policy i111plications or any debt-to-growth link arc so grent. Reinlwrt and Rogoff
, 1cqu1rc ,1 , , . , un 111<c the U 1 Is .
to make these cl , genuine banking unio1 , . n1 ec , tatcs. The solution, if there admitted their computational error, but dcf'cndcd the overall implications ol' their rcscarch.-1'
ianges may II . . 1, drnong other. t' . . . , . c
As economist.. I . we result Ill the d' .. 1 . . ms 1tut1011al 111noval1ons. Faillll Paul Krugman excoriated Reinhart and Rog.off's work in the Nc11 fork fones maintaining that
.111 the hirozo
. ., s. dnc policy llld . , I,
,crs bcoan to 1. ,, .. isso ut1011 of the E . .
-lit ozone, the authors arnuc. 0
,
. , nc,perhapsthc ,. b 1
cc11zethataso ,., , ,,
" ... austerity has been sold on false premises" and that Reinhart and Rog.off's results
11
had helped
in which financiil 111. . II g1catcst fear was the p . t 1 v_c1c1gn debt crisis was brcwinc to justify politicians in their desire to" ... turn their backs on the uncmploycd." Other public
, c I 1cult1cs . I ,
.Io I1Tl Beirne 111 I rv1 . Ill one country or ., . oss1 .
)I Jty of r
.1111w1cw co11to~io11~-a process
intellectuals and journalists weighed in on both sides or the debate. Yet the debt-to-growth
. ' ( arccl Fr t . , ieg1011 spreads t I , ... , "' . t
cIu1 mg the Ft ,
L. ,

cl zsc 1icr explore i1 "'T'I . . , o ot 1e1 s. L This is the topic th,1

, , 11opean Sov, 1 1c Pncmg rs . . issue was hardly settled by this contretemps, and this issue remains one oi' the most pressing
Chapter 18) 11 . , . e1c1gn Debt Crisis" t> . o , ovcre1gn Risk and Conta~10J1
. icy dist .1e1rne rn I r ~ questions in public economic policy.
!'he most importmt f' . 11l1gu1sh three types of' co11l'lg1 '. f~ 'ratz.. scher (2013, Volume III, Other work by Reinhart and Rogol{ such as their influential book. This fo11c Is fJi//1'rc11t:
. 11 , o1 t ic1r 'l , I . . ' on. unchm, t I . .
Slit c enly realize tl1 t tl , nc1 ys1s is the funchn1e 11 t I , , en a , rcg1onal, and hcrd1ng, L'ight Ce11/11rie.1 o/Fi11u11ciu/ Folfr:1' also points to potentially serious growth-reducing effects
d 1c ccon omic , fundamcnt
, I.' d type ot , ,
contc1g1on, . which invcsto 15.
m . .
d s Ill one count1 , 1.., , ..
Y " c ddngcrousl y poor, and th 15
1
. ,. 1 ,.}() ,,1eiu11
,... /)chi I
Ii
/ _ _ _ _ _ _ _ _ _ _ _ _,:_T:.:_11::._e.:::.E:::.'c.:_:o:..:,n:_.::1>1,:_:n,:_:h..:_1..:.o'.!..j..:.},:.:.'.'o..:.''.:.:e'..::e.::if...::.:''.:_I:..::
/)..:.e.:...h.:...t.:__J_ _ _ _ _ _ __
T/ie rcoJIIIIJ/IC .I o . l , "!USC of poor
- debt. As another example, Carmen Reinhart, Ytnccnt Reinhart, anc R aoff . . 'llld that 1CC, - .
or . . . e
l Knncth rhangs:
01e 1 0 . . ll1 l'uturc gcncrat1011s .' c extremely scnous
U.S. liscal deficits. place a I' roe . i111pos1t10n
, . ,l likely not 1cl rccCH.'.lllZC
. - . th . 111
balance . US tisC'1i
'
""miocd deht """ m
"dv,mel cco,,oooes ovc, a 1()()
" -ycm >pm, "' "J> t' lc' Debi Ovc , Volont' me,,,,,,.es ol , that ln,rcc,,,
I po litic1ans . ,liethe """" c:e o-ncrat1011,1 1 1111 .
0
Adv'1oced-Eeo11omy Episodes si"" 1800" Rcinlrn11, Rci,,hact, ,rnd Rogoff t <H-: te'cls 1
2 consec1uenees of , t I1c1r
. cIel1y
' in addrcssmg _ .. I hrl!Cr we,11,di-c benefits
I, Chapter 34). As we have seen, they cxa1nincd episodes or advanced-country de]J 11
there

~
greater than 90 percent of. C1D 't
' I I iat pcrs1stcc or
. l t f' 1ve years or I ongcr. r1 icy co _ ,,,d
ncludc t i,i 1 n policy" (p. 93). . 1ic u-c JJrcsumecit O l.illerm11c1,- . '"American and E - 1JC'll1 '
is a threshold effect around 90 percent, and that growth has been malena Generally, the countries o I'll1c h1rozo , , gues ' aga111st . l J1Ls view13111Volume III, Chap1110 trr 24). . ,
. II Y rec1uc ... 1
. .
r
'1ssoe i "tio11 with s, ,eh episodes o I" high debt l"el s. ,,owth than the United States. ,, ieiie_ -, .1 .diFflL'cts" Lcnueux (20 - vhilc
.. _, Len11c11x , the welfares' , , . , tc of the .
1
Weiflirc States: S11111 . . ar (' aus'CS' S1n11 a, ._,, 1nd e111p 1iasizcs that.\. E opc. this . is' , 1mlttcr 1' o
Ugo ra11in,, 11ml A11dce" P,e,bi\'rn a11'1opt to shed mm, light 0" the debt-to/ ,.,,y'"
Lc1n1cux . docs note dilkience. ... , .. "Sin structu1t.: ,,. '
th'll1 those . O rnorthc1n . iihritics ui. ol . t,1x, , . we1!fore, and1
,clatim,shir i11 "P,,hlic Debt """ Economic Gmwth i" Adva,,eed Eeonom,cs: A ';" of 11 11
Panb.,.a ,rnd P,e, h,t,"' (2013, Vohune II , Cha1,tec 21). 1 "Y '""' y,e ,, , , dehl United States is about 30 peicc ,.,, .1 sma . , tcdin' cxam1nmg , the sm . , . 'JJcrsistcnl de f'1c. s. h1vc .' cc
!
. I 'I I . hrge num mo-re ,1ntc1cs cid Europe. In b(.ith cases. .11 -s ..... sta11 ,.1
'""" ,c,co,ch """"' """"'"''-'
. . themct,c,[. "todels thot c,plo,c the cc lot mas . I.op between . ,, y degree, not or kind. IIle is LJ . , 1 I, I emicux 'scone us,o
1 11 1
"'"' grnwth. These tltctoetic"I models oOC, divccsc ,es,dts, so they """lode th,'. 1., ,,,d 0
"" hli e debt bet wcc,r I " "'ied States " .,,.,, hie m . ,,,,,g . , 11 ,tuc. c. . . i" "' "" o I. 1 " , eurn cr1s1s. . ..
ma 1
,e1,,1,n11sh,p
ltctwccn,Ie,1 l "'"I gmwth ltcco"'" '11mo,t stoctly m, emr,nce
J "''' tl ' r Panizz,t th"' to debt ptohlemstlrnt<ucseHm . , . , . is and comp,
1
the wc:llmCS .. , t'tlc ' 1s the . l"llccc"cc ol . "'"'.
, . , , and . .since,
.. Comh111cdw11ha11111lexi
, . . . l,. 1 I,e eco1101ny, I v only ,,cctas1n11l,ll
,1 c I . 11l t cns1s Ill l 1c
l',cshitcm '"''' 11,,,,, ""'"Y ,,,,,lies C.rni" "egativc cocceb1io11 betweco dcht ,md gm~th, h'.'. th'
. .
_ , 11 :ircsla!cssJO\ cci , .,
I 1
Since the American and ~u,ope, , . "111, we . ,,,1nized. we sI H iulc..1 exJ, , the magnitude I'll, ic lJ ..S pu l ic
I hctc " '"'' " stnwg "'" 1rn a mos,, I cc I"' mttsh,
p. 1 he '"""' I qncst ""' ,em""" of coLIIS.. ' the the American economy is lx:, 1noc-- lwope, , invcstois .. realize - O . 11 ,
.
key '""' ""'I "" ,.""' I In,t '1,t ,st
. "". I met Irods me '"' 1,1 cc Iy to ,cso Ivc. 11 "'
. ". cspecia
y 11 11
11 IS "" United States. That cns1s .. WI111vclopw ce c , , the United Slates' , ,., dluropc ,
"'" whrn the emoti,mal """" on s11ch matte,, ace high ,,,d whc11 political commi1t~c:, i;ttlc 111
hoth sides nl' the qocstio" ace so linnly e11trcnehed. Ponina ond P,csbite,o also '"'., a"d delit pcoblem" Ip '-12 ). . ,. tl,c ,io". ""'1" s between """'i"g Ci,-cccc ')" Trnnrr' (2,1blie 13-
'"rpn,t Cm "ny th,cshnld ellects hctwcc,, high dcht "'"' low gmwth co11trncy to R,i,,hot 1
;.,, Mich,1cl Tanner further cmphas1zcls . in '"Is A111cnca Ike ly First. with respect to ptil,
Rogoff(20IO, Volume III, Chapter 19) and Reinhart, Reinhart, and Rogoff(201Z, Vo . , , . . I bi burc cns ... nin11at1vc . . , l J 1 d States t 1,111
1'tcro
1
W,th ccspcct to dehc,ts m,d 'e . T,,,,,,c, """"" ,, . lctr is high,, "' the . '" c idernlio"
I, Clrnptcc
N 34). Volume III, Chapter 25). In shrnttl., J'Cr capita debt bull !1 worse than the mere l'(ll11s 1 ,,. 'tiso
. . Iy, ot I'" st,n1'" ,1""gcce with
ot ""rnsmg the ol Pam,za
muI . Prcsh '""el"""'"
. rtltcf debt alone, Tanner pomls
.111 any country ol ' the Eui
.
. .ozone.
ou t tint
.
' 1c ,1 the problem is 1m1c
' Sccol1( .
. . . I(otlikotl . . (-700-t ' 'O
\' I ime III, ( , hap t,.
. I lcbt. In I'annu s '
Cl 1-t) a111 c , the
'ISSCSSl11Cll


I f
(2(113, Vohm,e Ill, Chaptc, 21) A11j a ""'"" (\isti "" Chechcci1"-Wcstpho I, ""d Pin hPP R , ,ce 1
>

1
. l'<twee,, "n
r n ""I "" '1SSocn,i,on J l lewis and g,owth. In "Debt ,,,d Gmwt I,: Ncw Ev1de
1
1
,er of, public debt suf!gcsts. In t J,e.
- . . 0 t 1ig,1 1
, s1Jmll o rnd s!riclly
1
J' !'ons
. . 1cre1gn111c one cxccpl1on
so\ -(ircL'Cl'.I I 111')
lio the h,ro IA,e"" lla11m, Chcchccit11-Wcstphal a,u1 Rothe, (2013, Voh,mc Ill, Chap 1, considers the implic1t JCY(, untry .111 1:ui01Jc WI :11 the ceo1wmic . 'ruturc l C\C r, ( .
22 ), they st '" y the htstncy o I, 12 "" o-o "" co1m1 o.c, oven he I 990. 20 10 pen.oc. ,,,,d United . Shies Ins more clltthananyco eJ . , re so scvei ,,c how\,I i1 the debt ISSll .. cbcrcsolvcc.1' l. is
. l TI " y mn1n;
I WI I Ii , debt , , . , . , . cd States ,1 . . . l how w1 . . . i that he rcga11t s ' 11.
cxmni11c shrn1 nm
I impacts, m,d they allow fo, " "OO-li"'"' ,-,1,,tiooship hetwec" debt.' o, burdens 111 the Um! , . 1 or ii' not p,uc, . . deb!. a s1tuc1tioi () ('oclmmc's
I I I 11 I It be p,uc. . , . 'till1 ' 1s , III, ( , hap t cr "6
gmwt ,. "" t tc,c "" owe, eve,"' , r11hl,c
. debt, g,owth '1ppcms to he rnp'1 .
I I0 situa!IO , foci, 11 Particular. how w1 c e J I , LJnitcd States, - ). .n , ir merely
i" which deht i, highc,, h,,t below 67 reccc,,i ol' (il)p they n,nl little ,,,owtlHctanh"g cl . " . . . , . on t 1c 11 Volume . , ,u1tiral.'.111g. ( for
all? John Cochn111c focuses l [) 1 (' l1r1ne (20 ' . [~v allow111g. c1 l l-t l1cwsc
llcyo,,d debt levels ol , 95 pctcc,rt ol' Gile, """ is " Heg'1livc ,elr,tiooship betwCCH "'' ' ,nd grave, in "l11llatio11 am c,[ [" . .OC f1'1llOl1.
111 , 1s l l' l ., .~ ' - '
, c . rc'1s1n,, 1 ulkr ' high
. ' . Stitcs
J reduces 1 1hc1e "sale"
. . . , , , . ill like Y s . , Un1tcc1 ' , . .. nc. 1s
de ht "'"' cco,,o,n i e gmwtb. Tluts, i" lm,r,dest prnpcctivc, "'""" C'hcchc,i ,,,. w,st ph" ,' nd ,tccou111, the U111lcd Slclles \\ , , ,rncnl oft 1ic ,. s ). Jor ( oc 111 '1 .. I -bt Cochrane 110
Rot bee st1rpm1 the mttli,,c, or the deht-to-g,owth rclHtirn1Ship ad,ocotcd hy R,i,,bad1 '' ,c . . . . . theoo,c110
,1: It (p.- 7 . JJay1lslc .
Rogoff (20 I 0, Volume II I, Cha1ite1 19) and Reinhart Reinhart and Ro11off (2012, Vo[unty ~
\V1!11css1ng l11gh 111llat1on. 011
C.I ' ochranc '"I ntlation 1s . a r . 11 of SO\ C ittcrs
, , rcil.'.n de ,HI
- . 1Iic'1b1
1s
. . ,ra nation 10
'. 11ty, , (I cond1t10 . . (11'thc L 111(el '
11 1
. , States. th;1t
1
' . "ld what 111, . . l111ane1,1
I, Clrnptc, J4) or en,,,sc, "'" or11,, great '""" "' ,t,,ke ' is the P"hlic
' policy,.., mallernl, " 'tn e "' eveJ ol'dcbt-lo-(iDl. lnslc, ' 11 , 1Jrecanous 'JI result. \\ mil.'.ht they
0
lears that !he public wil I aw,1, ken Ilo I . le: 1 fina11c1a . 1 I ws \\ 1
c Jc. . . , nd Western 1:.l iropc. 1H11the \ravs -
that
"'"" implc"'""i"g, "'O"otnic slim,,,,,, whe" debt '"''' ,ue high. Regord;,,g this issttc. """ ,
l 'I '" I""'"
. Wcstp I_"I"'"I Rotheccn,,cludc: "11,,,ce, io light or the allempt to dclcnd "'" 1s1n_
'.' . is
.Inflation will become scvcic,' . , '111l . t ldin the U111tcc
1 1
. j States . ,1
irl , 11d RO!,!:( ,n rcC()llll the honest way.
1 1 11 1
debt wl!h ceo11om1e st1111ulus reasons, our results are supportive only if the initial debt kvc
below" cc,1,i" threshold" Ip, '20). 1I, 11 , novcrnmcntal
111 11
de l ts... ,lie , so II!,!: I') Reill . 11<ll , .1 Reill )I', iursc. one\ , ,av am . 1 . (irdclivcnn,L. . . ,
. II whtcct . . 011,plt"""
s .
hcconstn cd, Hieventu,1 111Y .
1. ,withlk
hi ,.,,, I n .
J)ilonn,ilc . .. , cv. lolull),. . .
-' ' . , --l)cain,L , 11icpu1c .. llatcdcu11c . . ,
llttdgct deliei1,, ccoo,,,nic slimttlHtino. debt h,,nlc,,,, "'"' ccoo,,,nic gcowth ace"" ioti""'''.,; governments deal with deb! 1
I I . ciuirc not on:. , y arno1111! ol 111 , . , to 11possess tltc
rel,,ted. s,, At,,,, A""""eh. Jrte,,dce,h G,,khale mtd L""""" Kotlikoll' ,,,k the qttc>U I . . 11 .. vou c Jc nnt ,111
country can p I - JJavrnen!S \\O. II,1 Jkvond tltc s1111p l
. uld JJ\c . I
di,c:ctly foe the U"ited St,,tcs: '"I low httge. sho,,ld
199
' the icdeo,I dclicit he''", '" "(icttct"U"'
. J'I a is to pay as promised. 11s \ .
IPron1ised
1 nominal paymci its - -,rny
l .. nver anc c: j hH Cl.
, '-'Cll JOI .Itt tllowcd lIic, cicbt. 1o lions a\,111d[ le to. c\,l
" j
be lloatcc 11 ' ,,.de rull paymc
]1(1'1 \.
. .t. c!IH
'11(
, I
Accm101i,,g, A Mcrmi,,glid Way IH l'v"h""' Fisc,,I Policy" Auccbach, Gnkhalc, and K" h~nol 0nor the aorccmcnt bc!\\t: 1 1 , rt Rc111lw1
1 .lillplic1tly
. . 'Jorcccl "' .. value 1 l,l_, ' x1ts . a me'ill' ol op. I counti .,.
( 4, Vo( mn t' II I, Clm1rtcc 2J ). the ""lhoe; foc,n "" the i "'" from Ihe pmpccn;c , economic ics. Rc1n _ 11,1 tl . , 11at1011 . l(. Hild
. 1 thc1e c.
gc,,c, "Ii"'"'
I ""'""'" "g They ,u,t e tha I de fie its i '""""' today pface " lrn,d,,, Ott '.' ";, honoring ol'thc 'c--
deb! ohl1gatw1. .
I '1111ics anwng. thei btor's 11c 1 disposa.I lirst. . le
11 Alter. recounting . rcccn, , , 1 debt c .yn, t chn1ques . ..' the cc
gc11crat1011s, and they use generational accounting to assess that burden. The authors argue r> 11
\(lgo11" examine . the lu II 111 cnu O 1 e
th
 .... --------''"'
-~---......-----------------

Iii !iii
7he 1,m110111in o/Smaeign {)eht I
The Eco11omin ojc .
,,overeign Dehl f
1
g1ow
, more c1uiclly ' tl,1<111 1(. expi I 1 contrast, rich nations borrow to finance current consumption. To Buchanan. such policies
I~ventually, with n . , , IK its c cbt obligations , .. . ..
past woul(l b lp1d ,md sustamed economic . ,, the1cby reduc111g debt-to-GDP rauos. constitute an immoral transl'cr ol' wealth l'rom l'uture generations to the current one. In such
ecomc 111 ,1n , , t g, owt 1 cv, tl . Ie circumstances, not only would default by ruture ge11eratio11s be legitimate accordi11g to
as discusse(! b ' age,wlc. 01 course ii' ,111 ... en ie largest debt burden from l1
a ove this t'1011 . ' ' 1111t1a 1ly 11 ,J I I . . tl1 Hucha11an, but such default is almost a l'uture certainty: "Economic self-interest will surely
policy r ... ' op might be for . 1 . , ig eve! of debt impedes grow
o austc1 ity und.. I . . . cc oscd. Sccon l tl a dictate default, either directly or through the inflationary process. in the real-world politics ol'
directed tow, l b e, w llch it creates primi, l. c' le govemrncnt could impose'
' 1c1 c e t rc1ny , , . ' Y lllc10net s I . g the next dccndes unless democratic governments reform themselves drnrnatically" (pp. ]72
with the pref' . ' rncnt. 1 lns policy ot', t . Lll P uses, with the surplus beitl
c1ences that tl , U . dlls enty v 11 . .. . , t 373). Buchanan penned these words thirty years ago. The debt levels he round so troubling
over the lasts. . ., le nitcd States and tl , . . vou c be dllhcult and i11cons1sten
. eve, c1 1dec,de. TI . . ie n,1t1ons of w - t d now appear merely quaint compared to our present circumstances.
Its assets 'tnd .. ' s .. 11Id, 111 a privJtizit . cstern 1::urope have exh1b1 e.
' c1II ect tie 1 pro . 1 ' ' 1011 c1rive tl 0t Geoffrey Brennan and Giuseppe Eusepi engage Buchanan ( 1986, Volume 111, Chapter 28)
and restructurin , . ccec s to debt repayment 1.., le government could sell some
g, out lor a c l . ourth th, . . . f' It directly in "The Dubious Ethics of' Debt Dcrault" Brennan and Eusepi (2002, Volume Ill,
currency th'. .. oun ry like the u , , ' ere could be an outright de all
, is is c1n unpahhbl, . n1ted States h. . J Chapter 29). Buchanan emphasizes that a debt which provides later generations with no benefit
government coul . ' ' e option, cspeciilly I ' w Ieh only borrows in its oWI
c1excite (or 11 . I . ' W ien othc 1 . J1e removes the duty to repay. Brennan and Euscpi focus 011 the "taking" that such a dcf"ault implies.
the real value or tl . . icic YCnJoy) a run or, . , . . means arc available. Fifth, t
le nomnnl I bt ,
Volume III , Clrnpter 26) s' cc ool1gation ri11s llldntic11J1te
.1s th, ' cI 111 .fl at1on which would re duce If a future generation defaults, then the default transfers wealth fiom some members or that
'
Finally, the gov.. . , ixt i,_ the government , I ~ option Ieared by Cochrane (2011,
1 generation to others of'the same generation, that is fiom the bondholders to the non-bondholders
. c1nme11t could . , . cou d 1nip . ., . . . , of that generation. Further, Brennan and Euscpi claim that " ... the 011/J' way in which f'uture
Reinhart tnll I> .. use d policy 0 1 f'. . ose d straightforward wealth tc1X,
'' ,ogoll (2012 V lllanc1al r . . , .. . generations can be negatively affected by debt financing is through a reduction in net bequests"
In "The Liquidati r . ' olume I, Chapter 34) cp1ess1on as discussed in Reinhart,
Chapter 27) (' on o . Government Debt" t> . . (p. 551 ). In other words, if' the current profligate generation pays less taxes than its present
, ,tnnen Rcml , . ,einhart . I , consumption would require, then it has more wealth to leave to ruture gcncrntions that will be
repression in dcl'!11 r1 1,l!t and Belen Sbranc1 f' .. anc Sbrancia (2015, Volume JI),
.iec, Iuced the reil ,' . . iey . the 1 t .
1 u1n to the en .., " 11 st .exp Ioie t I1e techniques . of. J1nanc
. 1,,1J fl1ced with honoring the increased debt. /\s a result, Brrnnan and Eusepi maintain that a future
. . ' costs ol scivcr . ' , . ip11 Icctl ev1dc1 , . . . . default docs not necessarily shuffle obligations and benefits between gcncrntions. but it surely
extend mg 111to the I980 . _e1gn debt In the period . . ice ol how f111anc1al repression
order or 1-2 percent . . s. Reinhart and Sbranci1 I~1111ed1atcly following World War II and benefits some members or the future defaulting generation at the expense or bondholders in
., . . .
1cst1 uctunng O ,
, so it docs' 10 t I1,1ve , the sudd,.' note l that fi llctnc1,ll, , ., repression . s1ves on tie I. that same future generation.
, . . ' r even rampant 111 . 11' . en (1e Jt-reduci1 ' ",. . ,. .' . . . Hosni Mubarak was born in 1928, served a career in the Egyptian /\ir h1rce, eventually
die not to be taken . , ,llion. But the efT, . . . ig effects ol default, repudiatIOll,
1ig 1it 1y when tl ects of hrnnc I .
unpa Ia table as JJ,. t
r <.:1pc ua 1 austcrt

"
icr alternativ,. , .
cs d1c as uns "I l
' Id repression, they argue,". became the President or Egypt, was deposed in 2011, stood trial for various crimes, had all
his convictions overturned and was alive, if not completely well. late in early 201(1. Estimates
10111 the end or w Id W 1 Y (p. 325 ). A rt,. 1 pec1 <a ,le as restructurin" and as
I . . o1 ar II L . I e1 t ie yc1rs r f' . e- or the wealth garnered by this humble lif'clong civil servant and government onicial diverge
t ic1r frnancial 1111 I t, l . . 1nt1 _the 1980s tl1 ' U . ' . o 1nanc1al repression rouuhlY 1
f' , . 'I ,e s. mngn ' , . , e n1ted St t .. , , '; d widely, but some or them put the ramily fortune near reaching $70 billion." " Obviously. he
',ndnc1al markets and pcrha . ,:.~.~lil era of financial re x, .'~ cs ,md other nations liberai1ze .
Cns,s of'2007--201 I , . ps 11 Idt1onal cxubcn , " 1 ess1on to an end. The expansion of did not amass this f'ortunc by inheritance, f'rugality. and good investing or his salary. Rather
, . . . . , "typical seciuc . , . . 'nee eventually I I . . J the vast bulk must have been appropriated f'rom the state, and those f'unds must have com1..
c, iscs, according l'J f> nee 111 which tiii .. . . . ic ped to bnnu the Fmancia
, ,c1n 1Hirt ''111 cI StJranc1a:1' . . ,mc1a 1 free (Iom and excess result o
in banking . from taxation. from grants to Egypt, or from debt issued by Egypt. Such accounts or vast
wealth accumulation arc so prevalent that they make the issue or odious debt particularly
!'art IV So1'el'<!ign Dcht , . ,
Cnntcmpnl'C//'J' S' .. / salient today.
,, . . . , oc ta and 1:11 .. The term odious cfchl was ori12.i11ated by a legal scholar or the early twentieth century.
I he social and ell . ., I . . lie al lss11e.1
l 11c,1 issues I I . Alexander Sack.'" Originally addr;ssing the legal aspects or when a successor state is obligated
JY the clever title or11 .. nvo v1ng debt go back l'(J' 11
S . . ' cccnt ))OJJL1I l I 1 ty cent UI.ies or more as em11hasizc d to pay the debts of' a previous government or state. the topic has broadened considerably to
overc1g11 debt miy l , clr x1ok by Dwicl G.
r I . . ' )C 011 1y 2 OOO , . . ' Iaeber [) ,, . , . ~- ' ,IX e111brace the circumstances under which the repayment of'sovcn:ign debt is a moral oblig11tion.
0 ot 1c1 forms or I It ' Ye,us old, but it 1 . ' c J/. ?Ii<! J,1r.11 5 OOO Years.
., . . le 1 . 1'erhaps . . Ill icntcd the " . Many scholars and commentators believe that much of'the sovereign debt or third world nations
picccd1ng articles hwe' , not surpns1ngly tlie 1 . sc1me_problc111atic dimensions
111 tl_11s
. ' 111 dl1c thcs, I . . ' llg 1ler d bt I . , . is odious, because rulers siphoned away the proceeds or debt to their private domain, leaving
part address the . e ongsta11d1ng issue. , . . c evcls discussed 111 man)'
ol111gat1on, most press s P,ll t1euh I 1 their citizens stuck with repaying the debt.; Seema Jayachandran and Michael Kremer discuss
1

the property . I .. , 11ig issues: the ethic. 1 'r y sa ient today. The articles
cffe ct'ivc Y declare tlicii .11 g its 111hc rent , 111 debt 'lll(I tlso .debt dcrau It, t11e duties . of contract the problem or odious debt and its potential solutions in "Odious Debt" ,Jayachanclran and
1
I 1sc 1vcs b . I ' ' 1c c1rc Kremer (2006, Volume III, Chapter 30). One way or dealing with odious regimes has been
, . ames Buchanan address,: .. d.11 ,rupt a11d lcgitirnatcl d. ~umsta11ccs_ in which nations can
to impose trade sanctions. but this method comes into play only af'tcr loans have been extended
Chapter 28) i1 tl ,
1 1c context . es The Uh1cs or[) t ~ el,wlt o11 their debts
. . r . c it Default" B and the 1-c12.imc has been identified as odious. Trade sanctions also hurt citizens living under
considers circu111sta11ccs i lo the fiscal behavior oft l ' uchanan (1986, Volume III,
the odious-regime. Jayachandran and Kremer focus on a system to avoid extending loans t'.'.
that yield cndur1'11g l, l'.1 w 11ch nations borrow(() . C)(ay s major democracies He first
enc its t . mvcst r., . odious regimes in the first place, obviating the problem at its inception. Such a "loan sanction
. o current and future g, .., ., .11 l 111 Idstructure and other projects
cne1c1t1011s He .
pomts out that today, by

( .
 - - - - - - - - - - - - ----- . . . . =~

Iii
Yhe Fconomin , The nco110111ics o/.',macign [)eh! I
program rcc1uires . I , . of Sovereign Dcht I
,. J(Cn[JJ'y" T
sovereign on some settlement terms, but some creditors hold out for better terms. Creditors
111stllut1onal structu., mg odious renimes ..
.Albert
I . Cl101. and Eric tc, perhaps
Po. , . undertl. ic~ auspices
. _earlyol'tl and , minht '=.
rcqu1rc . the development of ail who come to agreement suffer negotiation costs to reach the settlement. After the initial
t( 1 ~d1ous debt in "AC. snc1 lo~us Oil the broad,.
II, Chapter 31 , 11t1quc ol the O j'
le United Nations.
e1 moral linpli" . . ."
settlement has been reached, relatively Jew holdouts remain, so there is potentially a bc!tcr
scttlei_ncnt possible for these remaining creditors. !'itch lewd and Wright analyzc this bargaining
3(1) C'I . ). C. onsonitil , c ious Debt Dcict . , cc1tions ot methods for dcaltn,,
, . 101 'I '. nc j p ' WI( 11
osncr see the b, .' y,tc land ran 'HHI I( h , I l illC 'Cl
HH and Posner (2007, Volu[JIC
Sllu,:l!on with a rormal economic model. They conclude that collective action arrangements
'Y
1 tntcrf er,e W!l J efforts _ .. cncfits. or.cl 1oan sanctio ' rem er (2( )06, Volume III, Ch:1pte1, 'cc
can mc1e1s ' le 1ay 111
t I1e entire
sett Icment process, l)Cea use tIJc 1111pos1t1on
ol stamtarcI terms
Hist
111 . 1 tog. .
nit. 'Y , . sug"c '= st s t Irnt libenl .',1111 . coo11crat1011 . from . lls approacI 1, l1ut note that such efforts ., under , tl1 c, co 11 ect1ve
, action system encourages lrcc-nd111g.
' oc1ats to s , , ' nc1t1ons so , . c1utocrats , . . . . , Some commentators on sovereign debt markc!s believe there is a problem with rogue
suff, . . o1_ne extent, both t 1 mct1n1cs are for, I in cont1 ol ol odious re12:1n1c5-
~ ,
0

ei rng ot tl , . 0 urtl1e I , ccc (or cl ., .

crcditc1 --"-a, ere ct1tor who rciuscs
is to accept the terms ol-a restructuring
agreement and pursues
loan s11J t. ie dUlocrat's citize11s I I t ic1r own neo11clt 1i loose) to accommodate these_ 1
cost--li, f' ' c 1011 a 1
11
- . ,
toach and rcii,, n su1 c .
11 , ho1 nnd p . c- - teal ai 1 . .
_ ns cls well as to relieve 1 3
. Ie lull repayment through a variety of litigation clTorts. Proposed sovereign debt bankruptcy
1 10 U '11,e .11mec I c11rcct I y nt t I1csc rogue ere,11tors--somct11ncs ea II cc I vu Iturc mvcstors .
Ne enc . , 1t and 1YS!s. . 1c1111 unc onvinccd . thit llosner , sc,e l 111 benefits and costs to proccdt11es
rcs, tv 1 iu1 tc Rouhi . 1
111 urthcr ccltJ . t
, le loan si , . - a11111w1ch survives
inctton . . a. nd cr bankruptcy procedures, these vultures would not be permitted to hold out l'or l'ull
. , 1 lll"S<J SJ(ertl ' p~~yt,neJ'.t and would be forced to accept the same terms as other creditors. One principal pnrposc
c vcre1gn dcl , . . S le nee j f .
Volume Ill C . 1t c1 ises in "Do , < o1 and pros , , . . .. (~ CACs 1s to achieve the same results. 130th Rouhini (2002, Volume III, Chapter 32) and
debtors JJ,', h,tptcr 32). For RoL l. We Need a New Bai I ~ccts ol changed procedures tot
S~tleifcr (2003, Volume Ill, Chapter 33) address these vulture investors in passing, and ncithL'r
agree w.ilh e_ ~hlaractcrizcs the prcsc11 Jt1111 a key question is l1~ '-,' uptcy Regime?" Roubini (2002,
c1 cc itors 1 systc,11 , d anc 111 , tl . d iegards them as a serious issue requiring an alteration of'thc present structure ol'propcrty rights.
scheme wit! on Workout ter c1s one or ex .1 g Je rights or creditors an 0
l a !owe. - Ills, USLnll . , c iange off . . . l Robert Kolb describes the operations of vulture investors and considers the bcnclits and
agreement , l . 1 economic vil ' Y lllvolving tt,, ct crs 1t1 which debtors try ~o st s of'thcsc rogue creditors more fully in 'The Virtue of Vultures: Distressed Debt Investors
approach b1q1uI 11ni d, Iso . considers\' uc I . tin'n tie 1 pay111c11t. . e ere . 1to.. .
. Is accepting . a new payn1ent
, one contr . . v ldl he C' II s p1 o1111s, I l 111 the Sovereign Debt Market" Koth (2015, Volume Ill, Chapter 35). Criticisms of'vul!urcs
super111a1ority 1 acts would cont . et s a "contractL. I . cc unc er the original toan
. the l b o crcd lors spccit', .dtn coll,ccttvc actio Id ap11roacI 1. " U nclcr a contractLid. I arc often impassioned and have an immediate appeal. According to their critics, vulture
with I 11 I
. (c tor, the.. ice1 111 the l c auscs (CA(' , , 'f' investors arc greedy and offend against distributive justice by insisting that debtors pay when
ol hankru11tc . . sc1me terms arc . Jond covenant I. " s). Under a C AC, I d
th .cy. 1' re d, IIcacI y 111 f'mancia I t 11strcss.
'I 'I1cse cnt1cs
. . a Iso comp Iam
. that vultutTS Ii-cc-ride on thL'
Mechanism (SI)[
Y Icg1111c r
, <M)"2A1
imposed
.. or sovcrci~n - . . on all crcclitci .. I' . 111icstructuring agrecmen
~sp1opostt1
e<1ches , -
ts.\.oub11
a . d
t
~tllmgncss of' other creditors to accept restructuring offers, because that acceptance by others
quo system . lcr consicl, . Cl Y the IM r: 1 cl so considers the J(lil
~
, 01 ack J' Cl 111g th, . , ( JC So , . lrccs funds that vultures can extract. In addition, the critics sec these vultures as unfairly scckinr:
At the end o1.1 II o _system, rc111ai1 . . Vanous options I' , :e'.c1gn Debt Rcstructur111g preferential treatment over other bondholders. A final class of'chargcs against vultures maintain~

rights and d soci
. . c1 considcnr I JS p1efcr hi
c1 c.''
, , '-oubm1 , I
cone udcs that the stnlLIS
. . o 11 1 tgat1ons . , tons the pr l th at they harm social welfare by impeding economic growth in the debtor nation and intcrf"crinL".
'.cputat1onal considcri will permit sovcrci 't o_1lc1_n returns to the ,. . . Wllh the helpful efforts of other creditors to gel the borrower back rn1 its financial kc!. ( 'ontrary
,md s1111ilarl 1!1011 or en fore. , g 1 lending to , . . qucst1on ol what systei11 of to these charges, Kolb notes that the so-called greed or vultures is just the runction or normal
, Y, no chan,, cment sa , . exist al all 11. . . .,
,mkruptcy r,,. . . cc t1iat crcdito.. . nct1011, there . there 1s no ultnnalc conimcrce. That the vulture demands the J'ulfillmcnt or contracts treats the debtor nations as
l1 .. cg1111cJor . isnughtlJ tsnopros11"tl .
1 e1fcr re!Lti, . . sovereigns s cnc. Agaiiist tl l cc t rnt debtors will r1ay, competent parties able to enter contracts and that efforts lo excuse them rrom those oblir:ations
SIi
(2003, Volume 1s toIll ~~
th . , uc I1 is tl
cx1stential qucstion':w.JC SDRM )lropos; ~/ground or proposals ror n
Je 1a I
ort.en arc patronizing and demeaning. In addition, vultures provide bcnclits to the so;crcign
twenty-first , ' hapter 33) SI I . . . tll the Sovc1, d oatcd by the !MF Andrei debt market by providing liquidity to hapless investors stuck with the bonds or a dcl:rnlting
. ccntur 1 c1lcr eig11 Debt M '
l111ancial mirl 't. y 111 the alternntlJ 1 notes the circumst arket Survive'?" Shlcifcr
. ' ,c s 1ncl - ' o nun c111ccs 11 ., .1. sovereign.
ccfault by A '. ucingtheA,
1 .. lerous dn 1 ... icvai lll~atthcturnofthC
I. . tgcnt1na SI . . s1c111 hna1 , , . , llds in the . , . ~ . I lowever, vultures provide one bcncli! to the sovereign debt market over all others, which
m1sd1agnosis of' tl .. llc1lcr bclicv,. I lctal Cnsis, the R .. sovereign debt and othCI is _a crucial clement that pervades all ol'thc more than I00 articles comprising the three n1lu111cs
r.cc Iuc111g . ere 1 . ic .
probt , -
cm and 11 . , es 1 Hit V' .
,ll tous ban! .
uss1an ~ au t, and the nrnssivc
c1.-1 I .. _,
01 this work. The demands or vultures constitute one clement of the sanctions that help to
work best when1 tl .....O 11 the contnry SI ~ t1y to improv, ll 11oposals arc based on n
, c 1 01 rights 11st,1kcnl _ <tuptcy 1 .
sustain the very existence of the sovereign debt market. As we have seen throughout this
-tg Iits ,ire too .. icnghts 1 creditor '...,,, 1lc1f,.. et dsscrts "E c , .1c soy,-, et c1gn debt market by
1I . Wcc1k, not t
O
. s arc protc, , xpencnc, I . - . llllroduction, and as almost all the articles or these three volumes stress, there is one abiding
1,1vc llourisl11 t oo stron" Sl1l 1 cted most e11,, . c s iows that debt markets principle governing sovereign debt markets: without some reason for sovereigns to repay their
. ng c cht c- ' c1 er 111 - . _ cct1vel " (
cad111g Shi ,- -,. . markets. So c1intams that, . Y p. 85). In short, crcdilOI" debts, prospective creditors will have no reason to lend. At the end or the day, reputation
I c1 1c1 lo view . , proposals r . countries w I . . . . .
I_<oh:111 Pitch I' . I such attcm11ts .. I . o,. bankru1)t, . . _111 st1 ong crccl1tor rw:hts matters, because it helps to secure continued access to borrowing, but sanctions ma!lcr also.
I I
< c it default . .
Ot< and M
ark Wright , . dS cctrn
. cy tcg1111
ncntal lo a 11 . . es wr111 creditor rioh!S, ,. I -
[) 's le debt . Vll1s1dcr ll ou11sh111g . . "' And pesky vultures have their own small role to play in constituting the constellation ol"
c it Rcstru .1 .11
. ~
01 and credit . . le typicit , . sovcrct!m debt nl'lrkct.
1 c u, 1ng A TI 01 s seek tl . ' s1tuat1on tl ' sanctions that help to sustain the sovereign debt market.
and Wright 1(2(), ., icory of' Nc"(1t. 1 . 1c1r best adv11Jt 0 . iat arises in a sovereign
y I c, Id 1011 I11
a Weak c ' d
., c- c Ill "[ f 0J
-, 0 tune I II ('I . douts i11 Soverci 12:n
' Upter 34) Olten , a onti
dctual 1:- 11Viro11111e111"
Pitchford -
O
,c,toup ot crJ' C( ttors agrees with the
 ./
------------- <

The Hcunomics r!fS01'e!'eig11 Dehl I - 7he L'co11om1c.1 .

.
. . o/Sovereign Deht I - - - - - - - -. - - ,
1, . ,ri;,.
Cn111l1ct
. !\sym111ct1 ics anc ) I ')I~.
Notes ____________!_.!.;.:.,~~~~::1H. I "Inl'orn1allon . 7011 182, I' -- . ,
- ,
0
. 1110 Crisis, . . sec. ,,. ,'""" ,, I"F11w11nal
1 l'lms, flt,""'VJ(,.,,,,,,, md the C,1 C c:at , ' L ,i;,. Amcoc:'1>
l Gid D.
14. I oc,hsc,,ssi,m, ol the "'" ,, C'nsis, 1880- 18 "': "Thcil11ci" g C"'",' r,8.2, 462 -500: ""\_' R'Jl ,
0
o flo1cccst d"" "C the B,,, 'i'taee D. Ws>d'"""": 1/,s,nn', "'"e 200:: " Eocdhamco11,, IS8 11,,, "" .
I Sec McKinscy&Co111pa11y "Debt a11d (Not Muc I1) IJc Icverng111g, c ' - .. in<>. Acccs
1 blc at:
. , .mck; ""'Y emw/;,.;,gitt,/comwm
' . . l" r ,111ht11ry
." - ,1"' 1"' I"1 l,,_ ""'l-"" i() 15. Avai a , sed K, is fames Mitch""' ". ,'. 1 ,,,.,,,,/ '1/ E,a""""' C' is1' ,ml the """'./'',, F"""" ml 1/,slw' 1
http://www -""" - delcvc1c1g "' . ' is
Mchd"w" or 1he I 890\sci,::,,dcci"T he llacm~,,1:,, t'11p1Ud M,,,kcs, . Reotc.,, ""''

~
l'rincr and Kirsten W,ml. Jll imonu l,rne"' ltitlllll: lJsuiy,
?. sm
s"81hUiiitcd
C
A" g'1>12U
St1tesl 6.
Central lntcllige11cc Ar,cncy, .?he . World !act . hook .l .his . . w ch-b,,scd '"""" [J
. ,,s/thcW0 f' C'onta"ll ' ~ I Rcvo
- ontinually
ec uixlatcd
. , , and is available at: https://www.c1a.gov/l1bnny
. . I pu bi.1ca t'Itl 1s/rcsou1c~.
- 1 l Ao b,iy E>amplc " o . f the f "'"'"" 5. 1 \05 562 1 1 II,,,,,,.,
faell><Pk/ A cce.,scd Oc1Phc, I U, ,0 I 5 . . . .
1
, cl h S. RpgPI , \, 2005, 12:2, ! 99-225. - I he Med ""'I o,,,., '.'~;:,tcmhc, 2(1!1.\ 2, ;;,,: Camf'""' .. "\ ,\ :,':11cs "rt he
J. l'vll lhe dch1 i,;1plccm;ce ol ,ma lie,'"""'"'"' see ( ""'"" M. Rc,,;[w, ': K,,.,. .. . att1)3, I, rI 111(
o,. ,., 15. See foh" I I. M"'"" 'A
I I/""'' J(c, .,,,, I "'" WPol<h" gc,. ' """ell, ,,. ! he .
Negoti,,hi Iily," 1,,,,,,.,,,,,,:"',~ ,ckk< hwao ""'1 ,' \,y, ,005 i t,pi"'.'." ,gc t! '1W1", [ed.),
'7,it ""'' 9J 135
am/
.gticl ;\ S1v1stano "Debt I11tolcrancc," !Jmokim.;.1 l'upers 011 L',011on11_1 ,1cln . : .- JJc "Endks-t lh. On this episode, sec: Jo m York Modern L11L1,Jwml Ill," in (,co Ccor<>e Unwm, I 1'011 10th
4. The Ii,;,; ilia,.. ,ph,,,,,
, , ,;ew,,,f w,,, .. is ge,;cn,ll y """
"si . bed '" (',cc,o
. 1
I' l\lP,11p1
<><><I h" 1 1
' . , wac w,1 I"
;a,
"'"'"Y focms 1he .,i,.,w, of w,,," Simila cly 1\,ci1,., OOkd, '"N" peace "."""'" w,,;:1 1'.'~m,k IV 42,, "i a J/,,,,,,1,,,,,,,,,,,,, /deo . ' New I Thci< Ilea Img, with . I . 1,, '.l <>f' 133-. 7 l ondon: ml '-JJ1lll, "' ;\ ' ccsscl j 9,,,,,,,, wo h
Bar,!t and1the Peruzzi an~/'' , I ondon /,ay Su Jlll'./rcJJOrt.aspx?colrn~,s of'thc Bard1 8 am
"''""Y"
tl
Thc,c me ccmsidccahly ,,,cl ice mHeccd,,.1,, s11eh as Plato 1" 11w R''I"'",::, side ,,[ ,,g'.~ .,
!, a,/c,"" ,.,. " '"
f' I , ml Ill ,11 ,
h,i1ish-h
.
"'"'
y 1c.u,
' '""' "" 1"
, Dea lilt-
l 4' 162.
1
. I (' ,,,,,,,.,,., "
I
whcco he discsscs 11w rno""'""' he1w,,., wa, :md "'"'"Y, eommg dpwo "" m,J idlcP Available at: http://w.ww: s Jlunt, A New ,h J990, 50: I, !J,jfc1e11! l,g '
1ini11g and valor i11 his ideal republic as being able to overcome the wealth, luxury,' N ' b '. '0 I 5 ,md ICdwm . I/ ,1my, Mme .. {ho ))m<' ' 81. 'A
5.
oi'an
'
indolent
'
state.
A d,11n Smi1h, A" ln,1111,, ,,,,,.,1,,, N,,,,,,., m11/ C,,u "'"! I " ,i,,,,, , " , '"" ,
, . Methuc '"
." 17
ove1n CI :
Ldward III, .IOI/Ina.
S , (', . , M Rc111har ,
. , . I of L'conollltC ' I1 S Rogol!,
t rnd l(enncl
Univers1
ty Press, 2 009
/ the Nc11
'
1
'!able(, I, p. f,. Philadclph1a, I
/Vi){ Id 0/'1 '1
11

,
& CP., Ltd., l 'Jr1J, llook V, Cl"ptc, Ill. f . I 1/, I I 1 V 1 II\' I. Oil(' , I1 111 .
scmal 1'1 I , cc <11 men . l'rinccton \/ tli'\', a111 , . and \..
II I' 1nccton f'J ,!,1 1 . N c oetzm,
1,. The ""'Y ol 1h, debt ""d the hn,,n[ i"" ol lhe 1J oiled S1a1cs In, bee., the t1'p,c " //i ""' ""'. Fll7anc wl lo l', r [>i<Jl/7/lc'I c ' ,, - William ' , ,,,/ 1\/()(/cm
1
1l"'oks. A1no"g the,, a,e, R11hen l.. Weight, O,,c Na)(,.,, UnJ,,, IM,1, llanalfr>nj ' //,,.,.;ti,n~ I~- Sec Philip Coggan, f'a;1cr Modern J.urop , c ' I /nnma1to111
11 I ,aI ( ff(/ 11111Chapter
I 1
f]l
1,,, / Ji""'Y ,,f w1,,,, W,, o,,,, New Yo,". McGrnw,[ lill, 2008; fob,, Steele,'"" 1,:;::: 1 W"ik''. PublicAt. 1.
airs, i()J1
- 1 - Aimuities 111 fl!'ly ' , lire. 7hc /'' 1117 me"',4 1 Weir (1989 ' Voh1111l 1
, , th ('cntu1y, i\
eii"in": The f,.\'/1uordmw1 /,1/e w1d fnnes of Our Natl()nul Deht, New Y . , . cel0 l)
.
,
Sec James . I 1
l'vl p 1terba

7-;1e ()rig11 71 of. 1a, 'SS 20 ()~. , -'l()7--- 7 '
. the Late
Seventeen 1
, l , . ,o J 4, 2
o
..,,
Company,. ,~ 2() IO; and Jaincs' Macdonald,
. A Free . Nation DeeJJ . in Dehl, I>1111cc , '[Oil. Gcert Rouwcn 10 s t (eds), () Ji.ml Un1ve1. ,s1ty 1lIcLon"cv1ty ' R1s, 1 111. . Rem'11, D'ccm1c1 c -lor the 21 st
0 I
U11!,ccsity P,css, 2003. . 1 1111 [ed.)
,,Jgc C"pl!a/ MwI,,., o " Jim! x
,i tl11lio Cho,cc , 111,
' , " 1'11,a""" c- I J/1110 1 I1Rcl11omc" t 1011t1ncs , md M""'
7. Ak,o,.dc, l lmn i lt,m, Le Uc, to hmcs """"' Septemhc, J, I 7R 1 Sec II cmy C,.1,,.,, j Sec ais 19); Moshe Milevsky, th rPo\ ln<>lish Tont11ts1iisbu1y, opMt11ny,1 7() 13, wo1 k111g pai1)1;,i,11111h/c 111
1
The H;nh 11( ,1 lnum/c, Ilan,;/1,,,,, New Y1nk, c;. P. l'pu,,,., ""d s,,,,s, l 91l4, Vohm"_. 1 ,, 1es/70" Re-cxam111at1011 or c1 its! ~. 11 ~1 Thomas ''cs in I (193," a >/- the F11t11/'1' Sl/(}lf Y' . u t;111ts.
http://aJ Ith ingsham i lton.com/i ndex. php/alcxandcr-ham i Iton/a lcxarHler-ham I ton q
"""'"114 7-q 11111cs-h,1111 ilt1m-,md-dch1 Accessed 011 811, A"g" st 20 ! 6. I 0
. ,d,rnni Ito"
0
225- 258: Moshe A
M'levs (Y'
Century: With Rclcrcnc~ 7' 1/i11e. Whl' I 1c
, ,;, MPcl<dity IJ;
, V'1t1v
,'R,(>W""'"'
I 11/1' r
' ""' , ;, m """'"' Y w, I _ dc1'ti< 11111I< he
'1() 15. A 1onl11l11' ctits, ,llld only t le
th !ll,lll1 '
1 I""
. w lliam \ (II 'ty Press, - 0 I
s. Ab,mdcc 11,,,., Ihm,, Ne,, Yock R11t i fyi11g Coo'Cptioo, .I'""
27, I 7S8. Sec: h!!p Ila lltlm'.C'i.,m i [toW
corn/index. php/alexander-ham ilton/alexandcr-hami lton-quotes/70-quotcs/ 14 7-quotcs
Mi lc">ky, Kmg '
l'C/\t, Cambndge: I ('am 0
l . Ie u,,i,aN>
111c c-l , surv1vo1 s con
1i,n,c 1111 ' "
'IVC )C!l

. 17 Ftr1111 !11d<'lh'II< ( ~1J-(10

I,,,,,, '" ,lwi" ,.,,
'

, tl , nroup c01 IC,

1 111wn 1 a 1 lilc PP 1
aod deht Accessed "" 8th A11g'1sl20 I 6 _ . , Flmi""'"'" As mcmhs I 989, a I- 1'""' 11, """
o " tl'.c 1 h. ~;J/ "'u"" 1,. / '""'
9. C ,.,I 1,,m, .teO, thcst1"y Pi lhc stn,gglc t<o, debt freedom i11 A Na/inn W/w/f d: ''."' ~,, 2~ I 4. ,
annuitant extinguishes !)eh! CmciU ;ve1s1ty Picss, / the Jl,11 he1i,ccu
11
1

1
"I 1/,,, Nn1>,n,u/ 01'1>1 "' 11,, Aec ,,!J,,,T,o,,, Ymdlcy, PA Westholm, P11bh,hmc, l.L 71 , ''""P"'" ,,0. Sec C 11dps M"""" I I A i ''" ""
1' mcct,m Pcm"'"" , . Af,,,,,.,,,, ,I'In, . "'" p,css, 200 7, P. 41. it I ,,,1, """" I II"
Sec the "!li, ial """""" ""'islics "" gn,ss S<neccig11 d,h, lc,c[, """ il11blc "" hllp{~;'ccsscd ""1 llc,,n, "'" / 820 I 931/, ' 11
. / /iwp,n , u,.; "''"'Y . ,., 71'1' t "' , 0 , M11'1 ch,d.
1!! . 0

curostc1t/tg111/tahl\!,do?tab tablc&i11it~ I &language=e11&pcodc=tei11a225&plug111= 2I s,! C ,; 111, Mp1iclo'\

and France 17601 I'
1::''t:,::;:{,',:d,, ";"':~:::~;,,,,,,,,,
7he Finl ,a s11y l'i css.
:'''l,{9'.)~ p 41 !l ;;:;:, '..::,:::,. I SCI/ I" /0.1
the ( ,1 cat '
I ''1h Oct,,hc, 2015 . ,. _ . . . ,,. . , !! 15 L<"'f '
1 hank Gn !flt I1l l ' J J)iwson, y Jc Univc 1 /elf(<' , id
11 . The tllO " qmtc ! ,rn,k "h""' tl,c <h ! hrnlt y o I Imcccstmg t,c,,d, m debt I" '" I be - he p hi" 22. See I hvcn: a , ffl(k'll 1' 111 10 L 'VY Ycyat1,

~
1c,,,, "r ,,) 7 7 \' Loan Ru ' c', 111New ' 1,11cncall f,10//1 'Jl) _w. 00 itclll, J lnrco l' N c, ., Yo1 k t- 11Cl I
!111dgct 0111 lo,,k" 3,d y 2!! I 5, the ! 'HO ' " " ha ,c ,, poi t '"'"'"' "I debt held hy \ , .,.w11l
11 11
"-, "
Ce1111111 of Dehl ( 'nici 1
I"""' )8'l p[>. - '
' 1 . ty Press, 1' ' , ,. Lduai do
11 "e"'
, ,r,1r;11 I 1"
1' n,
/ ln/L'J 11a1,,, o
"'"''"" <>d '" ta)[' "f !OJ PCICCO 1 It,,,
i! aek,,,,whlgcs lh111 "'"" y "''''"' rn11l d "'" ':. '. ''.,:11ihl'.
bci 1>l debt i" 2!!4U q11 i le di lkec,., frPm I OJ pcccc,,i I" 1he ""' ,c 1Ct><>ct, i ! ,o,. sedc>; 'w ,., JS . ,, U111vc SI p ya1s. set: i o/ ,,()\' ' , , 11r/a/tflll m' 11711
'
, "007,
I 11
Prmcct,m' l'n1'edm " !Im! w1's "10 I """ !he R" '. I . cl "I"""' i><I" !! ""e~,1 !\' l'ecss, - 17 "
""'""" ie ,ic,d"P"'"'" a11d pPlicy. ''.s'""'." th,,, cop Id '""kC 1h111. 2040 deht k'd
";a:;e "'"'.'
PC1CC1'! ,,,. '" he gh <n 14 I P<'ccc, 11 o! t, 1W I <'1lhcc, rco,,,,," C BO !1>ccc:nts Im <c h,,d . . ,,,,I ,,,J
23 f'or the financ1al
Ugo l'an1zza, ,/\I 'Ill"
I advcntul [)eh/: f foll'
.~ \\'t/ Hitik7 1
,
4 . 1,
20 ()( , Box ('cn/111'1l'1
p 64; Mi~h'\on: p, 1ncctt:n
pnncc,,,n//t /) c 1, c)n111 74-2(i
. f'!tc (;//\ o/ l.u/1(/o
, ,I
11 1
"'"" time '" time. l'"""i"i"g the Ci10\ liw,yc,,,_,lec11d h,ccc,n11 ol this debt kwl '.'",hesc sis American Dcvc op mcnt /Jehl , acm' 7'hffe .11 , f"tnl /,al// ,1.111 1ty 1'1css, 199( 'It
1 PI1Cc11/1111c
- / / "''"" the "
debt be!, i" I 9'JO, I '''JS, 2000, 2!!05, JU Ill, ,md 2015, lhc mc,m ''"""" "'"' ""',' , ""'"' JI 1311
Coo11eratio11. S'mere1g11 'f'f'th Dawson, 7L. Yilc U111vc1s1/ J)t'f,'tCIII l,1g r. (i is b,1scd upon i

~
1 0

th,cc,,sts ""' "" m><bcsti """e o I 4 J '"'""' "' Ii DP. 1 he ahwl Cle fo1cc11st cnm w,,, L / ,,,,,,Id pp 50 53 anl k(in \ f, New Jl'lVCll, ' ff' 7/111 7'7/l' 11 1 /, p. 7- 'l J1nt11e , !18coun tIICS'llll '
"It all' N"t """'; >i "i<,ly the Im"'" en,,,. ""' the IMgcst 1111dc,cs1 i11,a1c occ11,ccd hn 1" "' ,(i rJ!' w,;; the l,~22 25 Loan B11l~J ~~nnclh S. Rogo ;()09, J'igurc o1~he tigu1c ictll~c~~ d,1t,1 x!s ,iv,1il,1'1k
M Rci1'lmrt
0

11.,,.,,., _,,
1
""" m,t '" he the c,;,;, ye,,, P[' 20 I!! foccc,.sti11g ;,. 2005, the l'llO cstim,>1cd this dchl:l,.[2).4 '4 1 0 "'' <y r,e11, - ,"""'' s II I
- . Sec C'ocmrn , . . ''"" !lo ,woe , '"""e """' .. ,p,c,,,[,hcc ' , A'"'"' 21 .' ., ,,
measun: to be 37.(, pcrcent; the actual value Was(, I .0 percent of' GDP for a forecast cnoi 0
pme11t "((ii.IP ow, j ":' 'Shm!li >c-yca, hmi,cm . . . . . . "" ,!/Cl'
/;,11,., """"""'' " i'.' ha~ tl,a!!hey '"\' .,,,,,
Reinh,11t ,md Rogo1l c_at.it'cl:1ta. Daw nic, 11,1'-is-d1ITcr~11/t. r 711111' 1, llt/(< ,, 1
Ii'"" '"" '. ;cecsscd "'' ''. 1'.,, , I .,ch< <''"'"'"
J',11ca1
12. I o "" ad""'"hlc h"ok, Stephco I, Am hmsc lei I, the ""'Y 10 N111/,,,,g !.,kc II ""'"' IV<" Id)! '"""ld,110,,al f''"' y c11so ', , "lmrt ' cmn /tl ' 1s-tll I s RPgPl'f , 7 11'!!09, 1 PP (X ,, - 7,I ,,1, l!,,,,g K' Jll"". I \."" ,m.'
!V/w //,,;// 1/,, 1) w," """"''"'"/ llai/ma,i 1863 180,, Ncw Y11ck Si"'"" & Sclmstc,, 20! / ;,.,;, "', h!!p:1/w ww.c,11;;''.:'.'i'.'.,, aml Kc,;Pe~:,;,,,.,ity """;.: I.I""""' k. I;" ,;'.'.,pm c. s" ede,;, '
I J. Sec lid ,,,,,.d,, 11,,,cos,tci11, Ld ""' d" L"y Ycymi, <Ped Ug" P,m Ina, U,tng ,,,;11, f.l,,1,1 I J,rn
the 1/isks ofS01e1cig11 Fi1111nce, New York: lntcr-!\111cricun Dcvelop111e11t Bank, 200(i, PP
';:,:61 25. See Carmen M. ei ' . p1mccton
,
t, 1J1w1cwl I o 1, , II. Pnnceton I 1 !le
'll'c ;\ustra '' 1/~.iland, 1L!:I
urn Canat'' l'ortuu,11.
, N n, ay, , 11
"''
26. l he 19 no11-dcfaulte1~:therlands, New , 0
Malaysia, Mauntius,
 ----------- _ _ ,e""

Ii-iii Ii.,
!he f:'co110111ics 11fSmercip,11 !)chi I
The l:'co110111in of,, .
11 , . ' oiereig17 Deht I
Il ldiland. Un1tcd l<.1 I
iiot o111 I I Other historians have chosen different endpoints. while still embracing the idea or a more than
<.c )tat least once sine: I 9 I d-11< tic United States. 1 he , - century-long period ol' historical coherence. Sec ror example, Jl'!rgcn Ostcrharnmcl and Patrick
lcntrnl Arncan R, l i . . .. lbc1111a. Algeria A1 " J, sc )() count1 Jes dcfoultcd on their cxt~rnal
Cami Iler. !he 7iw1sfiJ/'/11atio11 o/'lhc J/,Jr/d: ,.f C,'/ohul I /i.1/0/'\' o/111<' Ni11ctcc111/i ( c11/w1. l'rinccton:
[:cuauir,
. I Lgypt Iepu I S 1 1c 1lh1le Cl llna, Colombii 1t,oC d A1gent1 ~ na, A ustria Bolivn B1 izil BulgaJla, 11

India' Imuncs1a, I ' Iran
- dIt 1va<or, l'ranc G ' OSla R1c1 C 0 t I' ' ' ' -tic l'rinccton University Press.2014. .
, c, ern1any CiJC"' , ' c < lvo11c, Dornin1can Repu
' d, c,uyana, l londw as. l lungai1j
N1oe1 I' p <1na1na, Pai' wuiy d1y, 1dpan "1111dJca, , Jordan ' Keii CCC, ,<,uatenl'll 34. For the importance or guano in the first hair or the nineteenth century. sec Catalina Vi;carrn. "(iuano.
0 1 [) ' M Credible Cornmitrnents, and Sovereign Debt Repayment in Nineteenth-Century l'cru," Jo11mul of
[ :'llll'''l 1 1n1<ad I and '" ' , Cl U'. Phil ipp1ncs, Poland.
lohaL'o, ' Yd,
R ,CX!CO .. , M mocco, Myanmar, N1ca1ag '.':'l
1
;,lll1b1a, and Zimbabwe S,: ~'.1111s1a, I u1 key/Ottonnn rOllldll!d, Russia. South Afi ica. Spain, Sil
15.
l:m110111ic !!ist11n. June 2009, (,lJ:2, 358 387.
U.S. states that 1~crc to join the Crnilcderncy were not the only states to ddault bdorc the war.
'/!hi C'l'11t1111e1 of I 111 .. clef anncn M. l{cm\111t "' I .,111pnc. UruL'uay Vcne;ucla Yugoslavia.
r I I , unciu ,. II I' ' ,dl< <. ' I - . '' Michigan, Pennsylvania. Indiana, Illinois. Arb11s:1s. and Maryland all <lcfoultcd in the 18-Hls. Sec
27. 1t1;.,\/)(..
'
l\7Jl4. 97; and L1blc Ci Cl o11111,t)t)111,1c,Jc('tun. Princcton L~:'.1~et l tRolgolI: l!i11 Tune 11 D1f/e1i:~~-
, , Voluml' I Cl .' ' - l. crsi Y '1 ess, 2009 I able 2.1. p. ;J,
Jason Zweig. "Detroit Files Bankruptcy (20 I J ), Michigan l)efoults ( 1842)." If ,di St reel .l1111mul,
Barro ref',. ' 1,1ptcr I) s, r ' July 22, 2013.
f>n/111c c1s is Jan1cs M. Buchan 11 .: cc ootnotc I on J 940 . . , Michael Torn; argues that supposed instances oi'"gunboal diplomacy" were not priniarily l'ocuscd
28 rI al Le o1101111 Aim I I ')7( ' l, Barro on the R.1 I . . rhe article by Bucln1l'ln to winch
1e n1od cI <Ieve loped ' ) 84?
by F ' -, .i --'42. "37 , cnrd1111
' E quiva encc Theorem," Jm11n11 /
1 ' ' I on debt enforcement, but were really driven by other issues, such as civil wars or territorial rnnllicts.
Sec Michael Tomi. RL'j!lllalion and /11tcmu/io110! ( '011;)('n1ti1111: Sn1treig11 Oehl u,mss 7'!11n'
purely tcput,1t101nl 1 ".1ton and Gcrsovitz t
sove1e1g <lc l,t nia1 ' kcts,ppio<1ch, (1~ 81 , Volume I c 3
( 'rn111rie.1, Princcton: Princcton University Press. 2007.
11 l3 t wl11cl 1 most schoh 1s , ' haptcr 4) 1s rn ex1111pk o10 The two key additional papers on original sin arc: Barry Lichcngrccn, !{icardo I Iausmann, and ll:,>tl
'>7.
com11lctc I u rcputit I ' dl':rce cu111 t 1u Y cx11la111 the existence f
II ' ''
0
. exp anation or S<iv ' 1011 a so sccnis lei- . '
(ICIcnsc o j' t\le ieputat101nl 1pe1e1g11 !io1rown1g and !en CI'1e1r 1
' y matter, even if it cannot provide a
l',inizza, "Currency Mismatches. !)ebt Intolerance. and Origi1wl Sin: Why They Arc Not the Same
and Why It l'vh1Ucrs," National Bureau ol' Lconornic Research Working Paper I 00_1(), 2003, avaibblc
w i 011 T!1ree Ce11t1111n 1\-i11c'\o,1ch 111 Rep11tu11on u11cl) ing. M1chacl r omz p1ovidcs an extended
at_: http://www.nber.org/papcrs/w I 00.1(L Acccs,ed rn1 8th August 20 I Cl: ,llld B,1rry J:ichengn:en,
'.ep,11,tat1onal cxphmat10;1 lt111e on,: Pnnceton U111vcrs1t 11,~emutuma/ ( '001Je1utio11. S;J1e1c1[;// [)cbl
dll< , I he also uses 11 1 Ricardo 1-lausnrnnn, and Ugo !'ani//a, "The Pain or Original Sin," in Barry r:ichcngrccn and Ricardo
29. l'h ,. ender II' ~ ctnc po!a so . 1ncI LI<1es the dif'l'crci Y t, 1css '-.
1
007 Rather than offering a pure JY L

l,'ausrnann (eds.). Otha f'rn;1/e\ /\tone\', Chicago: University oi'Chicago Press. 2005. 13 -17.
bet\~'.) [ S lather Was the f)ICV1outitl[\ change to enrich h~t:, '.11ionnat1011 possessed by bono1,eJS See Aaron Tomei! and Philip R. Lane, "The Voracitv Effect," .-f111erico11 !c'c11110111i, /fr1'in1 March
lo11 owcr than 1, , . , d 1sbu1 g t:lll 1 ,. . 1co1 y.
pro111111c11t, I iyc1. I le had 1 I I c101, C harlcs V L'I I Jt)t)l), 89: I, 22-4(). .
Circg St . ct111011g thcn1 bc1no he 1' I ong tortuous relations! : . I ,e l11s son, Charles was a inuc 1 ]<). Barro and Ll'l' (2005, Volume 111, Chapter -4). Sec p. 12-+h. Malaysia rcl'used to accepted an I!\ff
, c111111etz tells his sto1"'y', t/l'/l uggc1. l\1ogcr 1v1 11p with the bankers of'Auosbur<> n1ost
1e N ,;1 " 's P0 ss1bl tl lo,m in the aftermath ol'thc Asian J,inanci,Ji Crisis. Iraq did receive an !MF loan in 201:i.
I 11.l;l;fftl Ne,v y 01 k: Simon & Scl
thron,
Ill
" n1 1'-'!un IV/w /',1 Y ic nchcst man in the world. an
" "'' d
40 II I!'Cs arc so designated by the World !lank and IM I. /\s l:,1sterly records ( p. I (l82) . the -+ I
the (Jcc, 1c southc 111 (',crman hnd 1uster. -7() I 5 As Conk Iii e1 I ned TI ie I 1Ie UII{/ limn of;, ac 11b
I Ill'Cs he considered were: Angola, Benin. Bolivia, Jlurkina Faso, Burundi. ( 'arncnH1n. Central
A St _nocsc supplanted the AL;' ls that included Augsb . l explains, when Philip ascended to the African Republic. Chad, Congo (Dern. Rep.). Congo (Rep.), ('i\te d'Ivoire. Equatori,Ji (iuinea.
which s cinmct1tl , .'ils 0 explains, I UL'", gs lur~c1 ': s 11 1 tl 1c dub mus uig hon were
1 r no. Iongcr part or the empire. an d Ethiopia, (ihana, (iuinca, (,ui11c,1-Bissau, (iuy,rna. I londuras, Kcny,1, l.,10 J'!)I{. Liberia,
JO. r he stm1c,_y tl11cd to d1sc1pl111c th~~/r ctncll ills f'cllow lender c lr1<IJ being the mal!l I labsburg lenders. Madagascar, Malawi, Mali, Mauritania. Mtwunbiquc, Myanmar, Nicaragua. Niger. Rwa11da, S,10
111 !.',wlan
' <,He l11sto1y ri
,. 0 .ngland's fill' , ,
unru y 1111 11
cnal bonower
s, <c the C,
,cnocsc, also had means
~ b)'
Tome and l'rincipc, Senegal, Sicrnl Leone, Sonwlia, Sudan, Ta1va11i,1, Togo. l lg,111da, Vic1n,rn1.
3 I. . " , 1 / 1 .il11dr I I dnc1,1 1rev I . s. Yemen, and i'.ambia. The nu111bcr or orficial J lll'Cs has lluctuatcd, with there beinu 3'> such
I o1 ru1 thc1 dis. u I h' De1e/01J111rn1 ' o ut1on IS P.G.M. Di I .. ..
"A11nuit1, ,cuss1011 of a11J1u1t1cs . of I llh/1c Credit Iii"'' I c ,son, !he !111a11, ia/ Rero/1111011 countries in late 2014. Sec World Bank, "Jlcavily Indebted l'oor Country (IIJl'C) ,;1itiati1c'."
cs Ill irly M I Ill gcncr1J Jno 756 L I J 90
C1cutcc/ Alu , ,, . 0 <crn Luiopc,. . ' and ton tines . om 011: Macn111lan, i October I 0, 20 I-+. Avai lab le at: hup://\1\\,,. wnrldbank.org/en/topic/dcbt/brie!Jhipc. Accesscd on
Oxfo1d U , 1u-11 ( Uf!/lo/ ,\fwl,e11 W 1'1 111 7he 01 ![;1111 of V /111 p,~rt1cular sec James M. Poterba,
1 1amN c ' 8th Aut>.ust 20 I Ci.
M,u kct c1nd (ic .
j t)97 ~7- J
n1vc1sllyl'i ,
css. -005, 207 224 , . Hlc\/mann and K , , ,
lVc1 nmcnt Debt Pol ,
a11e 7h, 1
c,
, clnd I Ian.,:01s R VJ I . C1cc1t Rouwenhorst (eds.), Oxfo1d,
i11a11cia/ /11110\'Clli0/1\ ic !/ ii
41. l:astcrly's par,1dox ol' i11ueasing debt resulting from debt relic!' is not the' only iro11y ol' l'lforts to
help countries overcome excessive debt burdens. ( arrncn Rei11hart and Kc11neth !{Ol.'.olf c~,1111inc
:l2. Sec ~;1; t7~u1-i'r1 .l9 . icy in I iancc, 1746 17.'>3 c..'l/md Dav_1<! R. Weir, .,r he 1-Inancial the issue or "Scri:il l)efoult and the l\iradox' oi' Rich-to-l'oor Capital Fltms,". f111t1-ic:111 !c'rn110111i,
111
4 l(ir a ri ii Y Rl'mhart, Reinhart ,
0
na/ 1 l:cu110111ic / !iston', March /fr1ic11, May 2004. 94:2, 5] 58. In the lirst instance, as noted by l{obert 1.ucas, it SL'ClllS that n]()rl'
. II' lC'r catalo11 r I ',Ill(( Ro off (2(0 . capital should !low l'rorn rich to poor countries to c~ploit the pn:sun1ably higher risk-adjusted returns
Sbrancia(201S ' c,o t1c1<:elmi< ,, '.'. 112,Vohu I ,
I ,anc (2012 v' ', \-olume 111, Ch:qiterl~~; ol flllancial rcprcsne 'Chapter 34). p, 77 and l<JO(llOtC tii,1t should be available in a lcss-dc,eloped eco1101ny. (Sec Rtibert Lucas. "Why Does11't C,1pital
the i.ssuc is' ',>, un1e Ill, Chapter 16) ,lddrcsscs the issu; 0Sllofn. In Volume Ill, Reinhart and Flow fro1n Rich to l'oor ( 'ountrics' 1" ,.f111l'l'icu11 Fco110111ic //1'!'it'11. May ItJ<)O. 80:2, '!2 9(1.) !{cinh,irt
. Debt" ' we ..Sc,~,ii So:(anncnM . . ' R
and Co 1
with I
c1rane(20ll
V m111ci1l
' ' cprcss1ond1rccty,w1
I I ii'c ,llHI Roeo!T ,ll'L'UC that, 11011cthclcss. sornc:tirnes too much capital llm,s to lcss-dc,elopcd nations.
Return ol',li;1'.' 11 'i'." 1 of l11tcmurionu! j:. t:inhart, Vincent Rci; 11 _ohi'.ne Ill, Chapter 26) discusses As thc; 111ai11t;1in. some nations arc dchr i1110/cru11! --their eco1HHllic>s and institutional structures
I(, l7 48 I 1.inc1,1l l{cprcssion " B .c u11u1111cs, 2015 ')( S l1l,11 t, ,llld Kenneth Rogoff "DeafJJig arc su~h that they arc able to carry only n:ry modest levels oi' debt to (iDI'. 1-,ccssi\'L' lc11ding to
' ' , ntcnntioll' I M ,mquc de ,,. ' ), ' -S~~- C ' TI , these countries has led to serial ch:foults. Faccd 11ith this record ()1 serial dcfoults. lenders ,tre
with Public I) It~) ,l o11ct,1ry Fund "TI ranee, f.'i11unciai ')'~ "/.'. arrncn M. Reinhart. .. w
M. R<:inh1rt J~ l l v_erl1angs," Cha1llcr :;' 1 ,1c Good, the lhd 11 lal11/11r Revie11, April 2012, No, naturally reluctant to lend. Further. the internal conditions ol'wcak political i11stitutio11s that kad to
' , .ico1! Kiri o rVi1r//E ' 'l( tic Ugly !OOY 1
1) J'nl!;
and On-c!o;Ji ,cgaard ,llld M 1, ' ~conomic O 11 11 , cars ol e,1 - serial dcl'aults ,i!so dissuade c,1pit;JI 1rnrn !lowing to such troubled nations.
_l.l. l'crJ , is ncnt, June 2011 1,: '( ,c 1en Sbranc 1.1 ,, 1.. uo,,, October 20, ,. and Cannell Sec the I arious articks in Robert W. Kolb. l-'i11011ciul C'011tugio11: '/lie I iml lhn,11 to the /1,,u/th o/
1'11. most f -- -). ' 1rl'l111 . -
1\'u1io111, Jloboken. N.l: John Wilcv & Sons, Inc .. :2011, especially Robert W. Kolb. "What i,
Revolution 178,;)mously, I lobshawm s I , c1,1 Repression Redux," J,'i11011cc:
- 1848 J dW t lC It Financial Contagio11 1" pp. :l I 0. "
Lnc I lobsh,1w111 T ' , t lC Age or Ca iit'!I ' mg nineteenth cent . . .
( u;Ji!u/: I 848 /y/c ,.fgc uff<n11/111io/. ; 1) 848 1875, and the A ,L'.1 y, i\: embracing the Age ot Carmen M. Reinhart a11d Kcn11cth S. !{oeolT. "l)ehL (iro\\th and the i\ustcrity Dcbak." ,\'t'H' li!il,
7!mcs. April 25. 20 I :l. Available at: http://www.11ytin1es.co111/20 ! .1/0.+/2h!opini()11/dcbt-gro1,th-and-
Vi11t,1gc !look. ', .l, New York: Vinta '~ , 9 /8./8, New York gc_ol bnpirc, 1875-1914. Sec:_
s. I )89. I he till'"' "
l1 0() I SgI Books.
, ,
19%, 111 l',1[;e . /'J' V1ntc1gc 13ooks 199(), 7''1, I , h
,/"i.' o/
thc-austcrity-dchate.htrnl'' r 0. Accessed on ~th August 201<,.
' vcrc first published . , I;' :111pirc, /875 / 9 / 4 New York:
. Ill )(,,-, ll)7~- . an<I 1989, respective . IY
 lxi
Ix The Eco110111ics o/'Sme!'<'ign Dehl I
711e Economic. /' <;
I' .1 o , ovel'eig11 De/,/ I
44. Working Paper I 0036, 2003, available at: http://www.nbcr.org/papers/w I 0036. Accessed on ~th August
,1ul Krugman , ...1.1ie, 1~xcel
, . Dep _
nyt1mes.co111/2011/04/ l . . ress1on," New Yort T1111- , 1. . 11' 2016.
2016. 1J/opmion/krugrnan-th, .( ( Apn I 18, 2013. Avai !able at: http://wW Eichcngreen, Barry, Ricardo Hausmann, and Ugo Panizza, "The Pain or Original Sin," in Barry
., . e-exce 1-depressi< I1t 1 1 ' I A ,n1st Eichengreen :rnd Ricardo l lausmann, Other l'eoplc \ 1\:!011cT, Chicago: University or Chicago Press,
,ll mcn M p ,- 1 lll. 111 FO Accessed 011 8t 1 u~
45. C,. . ,cm 1art and Ken , 1 , -
1_0!/1, l'rmccton: Prince[ net 1 S_. Rogol{ This fo11, . . . . . . I 2005, 13-47.
Carmen M. Rcinl1 t Von University Press '()(Jl) ( /.1 D,jfel'cnt: Ught Centuries o/ J,nllfilclil 1'.cdcral Reserve Bank of Kansas City (ed.). Nell' Clwllrngcsfiir A.fonctwT Polin, I 999.
/ 1
" , inccnt R I '- 11 lloi:cs, Juan H., "Information !\symmetries and Conflict or Interest during the Ila ring Crisis, 1880-1890,"
i,itcnwtirma/ f:'co110111in ' c1111art, and Kennet!1 .. /
47. C annen Rcinliiit cl,, . t'
I ,
_(!
15 , %, S43-S5s
C,ll 1y )cl , , . . ..
Rogoff, "Dealing with IJcbt" Jo11rnal
. , I 111a11cial I fis/!J/'\' Rniell', 2011, 18:2, Jl) 1-215.
Cioetzmann. Wi II i~rn N .. and K. Gee rt Rouwcnhorst (eds.). Tl1e 01'igins o/ I i,lue: T'l1c 1-'i11a11cial
{cturn of' Financial Repres~~ve~. th~t financial repression I ... , . . .. ie
16, 37-48. on, l:3c111que de F , , .. lc!s teturncd with a vcn"eance. Sec TI . f 17 11ol'(J/io11s that Ci'eatccl Modem Capital Mal'kets, Oxf'ord: Oxford University Press, 2005.
l) . I ' r,mce, / 1/1(// . I s . . D . 7 NO
Ciordon, John Steele,/ familto11 \' nlessing: The Hxtmorclinan U/i' and !Y111es o/0111' National /Jehl, New
48. dVtt Ciraeber !) ,f . y1 .. /( ia , talJ1!1t\' Rc1in1 A1ml 201-,
49. TI , ' () 1 lie f1n 1 5 ' , York: Walker & Company, 20 I 0.
le 1Guardian ' "M ll 1.lctrdk
. hm. I ,OOO Years N. y
Ava1 able at: http'// ' 1 Y ,-ortune Could
, ew p,, orlc
. M ,. eI VI11 c I louse l'ublishin<>,
0 20 JI. C:raebcr, David, fJeht: The Fil'sl 5, OOO Yea I's, New York: Melville !louse l'nblishing, 2011.
1 s
Ace'" I
- cssec on 8th August , www.thcguarl' ' < tan.com/world/!O I ,ec1ch :70b1 t'i.
, , ays Expert," February 4: 20JJ., C,uardian, "Mubarak Family Fortune Could Reach $70bn, Says Expert," f'cbruary 4, 2011, available at:
50. J\lexandt:r N. Sack, Les;016 .., i.. - fcb/04/hosni-mubarak-f'amily-lortllil" http://www.thcguardian.com/world/2011 /feb/04/hosni-mubarak-frimily-fortunc. Accessed on 8th August

The !'t,craturc on the ct p//01

oh/1ga/11i11s/i11m1cih"C\' des lrans/im11atio111 I ' 20 I (1.
5 I. c1ns
Ree ue11 Strey
,. 19 17 ( e.1 ctar1 -111 " Ie111.1 clctte.1 1mh!i1111c.1 cl il 11 rres llamilton, Alexander, "Letter to James Duane, Scptcn1bcr 3, 1781," in llenry Cabot Lodge (ed.), The
1
0 ious 111tt f' ' - Works o/Alcxancl<'I' f lamiltu11, New York: ( i.P. Putnam and Sons, I 904, Volume 3.
, . Wit! 11cspccttotl,
V0..Iummous , ' ire. o debt ingeneral ai I r . . e
t11scuss1ons are p, . ,, A le odious debt of'tli . ' lt O tlmd world debt in 1nrticular, is quit Hamilton, Alexander, "New York Ratif'ying Convention. June 27, 1788," available at: http://
F~ v . ,0111ner1ta/ .J e" '11 i1c1c1 dam. () 1 lI< 1world t, t ' r ,e a 11 th ingsham iIton.com/i ndex. ph pi a Icxander-harn iIton/ a Jexandcr-ham iIton-q uotes/7 0-q uoks/ 14 7-q uotes-
. s, c 1ou.1 Dehtl'. ld ions, two extensive rnd reprcsenta t\.
K11 [J11 ,_ . . . ,,(l(y, 1~ondol]' E J .. 1_,/)(),\'e /,en r ' ' I I{\'
1/. oycc, ,1/nca .\ Odio111 /J I . dt! iscan Public1t 1 c 1//g, C.ol'mplion, and the 7'l1ircl /fol111c. h am iIton-and-dc bt. Accessed on 8th August 2016.
1
7c:~J Books,-2011. e J/s: lloiv Foreign Loc,in\~ :ls, ''. 91 : and_ Leonce Ndikunwna (llld Ja "'. ilob~b'.1wm, [!ric, !'lie Age 4r::n1;fn', I 875- I<) /4, New York: Vintage !looks, I 98').
111
S2. ;)rnl th c original propos!I r cl C a1,ual I light IJ/ed a Conti11e11I, Londoll Job~b'.1w111, [:nc, !he Age of.( U/Jllal:. I 848- /875, New York: V111tagc Books. I 9%.
c )t Rcstructurin'" . ' or a SDRM, sec A , 1lobsb,iwm. l.nc, 7/ie /lge of Revo/11/1011: J 78<J /8./8, Ncw Yorlc Vintage Books. J l)l)(,.
New Approach to sove~e ~ I
extcrrnl/ b . g, lnternaho1nl M nnc 0. Krueg,. "A igil llunt, Edwin S., A New Look at the Dealings or the Ilardi and l'cruzzi with hlward 111," Jo11mal of
. ' pu s/J t/exrp/sdrni/, ' onetary Fund I ci,
1(un1bcrt Rafter, "The lM!':11/sdnn.pdJ'. !\cccssc I , ~002. !\vai!ablc at: https://www.imJ.org L'co110111ic I !istory, March J9')0. 50: I, J4lJ I 62.
.ochn1cl
J'
, I hascr
< dll( . J\ , sSDRM ---,simply[)' .,( on8thAt,
. igust. 1_() 16. for. a contrary v1~\V, , see . International Monetary Fund, "The Cood, the Bad and the Ugly: I 00 Years or Dealing with l'uhlic Debt
! l'opo1a/. . 1 rcston (c j.) , Isc1strous Res I , 1 1. , " ChrtS Overhangs," Chapter 3 or World !,co110111ic Outlook, October 2012.
24() -,'( .1. 1or Re.10/i-i11g the Tf . . <s. ' Sovereign Deh . c ict LI, Ing Management? 111 d
K, ~ JG. Ill(/ Wol'!d /Jeht Cril'.: I :'I the C m.1.11oad1: C/u1/le11ge.1 a11 06 International Monetary Fund, Wol'ld J:'co110111ic Outlook, October 2012.
11 Joclmick, Chris, and Fraser;\. Preston (eds.), Smcr,i,g11 ncht at the C'm.1.1r1""II': ( 'l,a/le11gc.1 al{(/ l'mf'n.l'(l/1
SJ. s .~ 11: 1cth RogolTand Jerninii '/, _ Oxford: Oxf'ord University Press, 2
c 1cmcs 111 "lhnl . 1 .cttclnieyer co . for Re.10/ii11g the 7'l1il'd World !)eh! Crisis, Oxlcml: Oxford lJnivcrsity Press. :rnor,, 24(1 2(J(>.
l'apen '0()? ' "uptcy Proccdur,. r01.. ns1der the history 0 r. I , . . 1k0 ul Kolb, Robert W., "What is Financial Contagion?" in Robert W. Kolb. Fi11a11cial ( '011/agion: J'l1c I 'iml
' - -, 49:J, 470_ cs Sovereigns: A .. a l~1nat1ve sovereign debt Wl; .
507 1IIS!ory of Ideas, I 976-2001," /Mf Sil!.17 l'l1rcat lo the Wealth o/Natiom. I lobokcn, NJ: John Wiley & Sons, Inc .. 2011, J-10.
Kolb, Robert W., Financial ( 011tagio11: 'fin' I'iml Thrmt lo 1!1c lfralth of' Nations, l lohoken, NJ: John
Wiley & Sons, Inc., 2011.
References Krueger, Anne 0., "A New Approach to Sovereign Dehl Rcstructuri11g," l11lernatio11al Monetary h111d,
2002, available at: https://www.imf'.org/cxtcrnal/puhs/J't/exrp/sdnn/cng/sdr111.pdC J\cccsscd 011 Xlh
Adams, P,1tricii o /'1011 1 August 20 J(1.
l 011 <Jon F1rtl1 ''
c p ' Deht1 t Krugman, Paul. "The lixcel Lkprcssion," Ne11 )1il'k fo11es. April I~. 2013, ,1vailablc at: http://www.
. . ,oosc,199 l ,1 11_1
1

Ambrose, Stc " 11 _,scan : u lJI'icat1011s, J c 111'<

, . C o, .i.11,,1,on,
.
ancl the. 11. . , . . , ' r, nytimcs.com/20 J3/04/ J9/opinion/krugnian-the-exccl-dcprcssion.htm I'? r 0. Accessed on 8th August
/ 86 l ,,,) ien I.. , Nothing 't , Th cl IVnl'lds l:11l'inJ11111C11illl Lc.~ill.
1 1 1 1
'"'~- New y 01 -J.. .. ,/(( !11 the IV01 / . 20 I(,.
Borcnszt
,1 c, . Clll: .
. :duardo, ' Simonl cl:c s
Eduarti(J I
, c iustcr, 200 I
d: 711e M,rn WI Jo 811i/1 the fra11.1co111i11c11tal Raifro/li / Lane. Carl.;/ Nation IVhollr F!'cc: The f:'li111i11atio11 o/the National /Jehl in the ,lgc o/Jack.1011. Yardley.
1
( 01ere,'s. // r'111a11ce,
,. ' ~cvy y, l'A: Wcstholmc Publishi;1g. LLC. 2014. -
llu~liall' New y -J.. cyat1, and Ugo Pan., . . . Lodge, 1lenry Cabot (ed.), The /Viirk.l' o/ 1 1/exa11</el' !la111i/to11, New York: (i.l'. l'ut11.1111 and Sons. I ')0,1.
J\prii'1:1'J7J(c1n'.,c;s M., "13arro o1~1\~eltl~l~r-A1:1_crica11 Dcvc\~z,;,111.1/:11t'1f11g with Ueht: I lcJll to Unlit tin' Risk.1
i, 0-, 1 137 o ,1card1111 I' . en lanl 'l()()" Lucas, Robert, "Why f)oesn 't Capital 1:Jow from Rich to Poor Countrks?" ,./111('1'icu11 /:'co110111ic !frl'ic11,
C o<>g111 1
"' ,J, , JJI 111111 ' /'"fh'I'
20
-, .'42
Pmmises: D ,
' :qu1vale11c,c 11 1cor, "' - ,i.
cm, .fo11ma! of' Political {conolll. ' May I 9lJO, 80:2. 92-%.
. - 1
c. >I, ivfnnei I I MacDonald. James,;/ Vin' Nation !Jl'l'f) in f)eht. l'rinccton: Princeton University Press. 200.1.
WI( 1 IC Nc11 W / I ...
C ongrcs ,
D1ws . sf1011c1J Budget Orticc "'J'I o, ( CJ!'c/er, Philadelphia l'J\: !'ublic/\rtatrs, Marichal, Carlos, ;I Cc11/111T o/ !Jehl Crises in /,ali11 ;/111aica11: Fm111 !ndc'fJC11Clc11ce lo the (,'real
L>c1J/nsion, I 8]0 I 930. l;ri 1iccton: Princcton Uni\'crsity Press, I l)~lJ.
' .on, Tank(,1if'fitJ .. ',_ ie20i5Lon<r-",. ,
H11hh/e N, 1, !lie/ 11'.111 . ."' f et Ill Budoet O I " Marichal. Carlos, /Ja11km/ilC\' o/F111pil'c: Mexicw1 Sihel' <11{(/ the /Vi1n her11ce11 .~Jwin. Hritui11 and liwwc.
Di I , cw l lave1r Y.tlc U . .a/11J /lmcl'lca11 L>cht (, :". ut ook, July 20 IS
c \Son f> (; M . ' n1versity p l'l.11., The(" 1
7
I 688 . I 'i . ., 71I(' Fi11a11ciu/ R : . rcss, I 990, . - I ty of London a11cl the I 82] 25 /,otl) 17()() 18 I 0. Cambridge: Cambridge llnivcrsity Press. 2007.
McKinscy&Co111pany. "l)cbt and (Not Much) l)ckvcraging." 1:ehruary 2015, available ,it: http://w\1w.
.. .6,LondonM . ciolutl()11i11F, I
1:1dwngrccn ll .. . . c1cn1Iilan, I()( 7 , ig and: ,I S111d1 l I , , /'I rnckinsey.com/insights/economic studies/debt andnot much delcvcraging. An:cssc:d on Kth August
Origi1nl s' dtty, Ricardo llau,m i . . <! In Devclo1J111e111 oj'!'uhlic (re<'
2016. - --
, ' . in: Why They Are Not tl~1~11~.. and Ugo Panizza, "Currenc . . I
. dmc and Why It Matters" Y.M1smatches, Debt lntoleranc.::, anl
, Nat1on,1l lltiiedll O1,'.COllOilllC
,,_ c11-ch
'-eS '
 -------~----~- - - ~ - ----

. .1. .',ol'cl'eig11 /)chi J /.riii

/xii The f:'crm,!/11ics o/So1ereig11 !Jeht l 7he /;'com!/llll of' . March 19'!'!,
. .- . 111 Fco110111ic
. 'J't" ,/1/lCl/l( ' Hn1c11'
... , Voracity LI cc ' . , I :-;8'!
Mliklcthwait, loha, m,d Admm . W<>nldndg,,
. .Th, ( ,om1omy A Shmt, "'"W'
. . , " 1 0 Rno/11/10111
. .. . jc/eil,
1/'JI With T R Lane, I he . T h1ctlharncnlo, .
'fornell, !\arnn, and Phi ip . . (' isis and the lha11 1'.1n , .. / / /i1/o/'\' Ne11c11,
N cw y mk: Modem L, b,my. 2005 . . .. . . . I" ('c,,tm Y: ,,1
Mllc'Sky, Moshe A., m,d Thom,,, S Sal i,b,,cy, "Opt,,nal Rct '~"""' T,mtmcs I"' "''.:7 . I up://a~<'"'
89: I , ",-46 "'' w,,,t:1,dmcidct, "Th<B''.';:;, ;
T,i,,,,, Gttd ll., arnl Ktt: < O fCttstl,eirnt: ""'""' I.me,, ,
.;,,i t.d Mt<<kct:,'' f "'""""hi<d . ,,,mlttbk
..
tst
.
IM""'" to Mnoatlt y flc,im,t i"'
ia 1693," M,,y 2013, Wtokl,,g papc,, "'" l"bk ,,t ' ,, 1891. J\n Early Example '~ . / I- continuously upc' ' :-ith ;\ugusl
ah" 1.107 282 4. Accessed "" 8th A"""" 20 tc, I c .,, <mY' A I,] 2005,
' t2:2, t 99 ____
7,~ , " " ' " Agrncy, Tlw /J'O, /\/ <tbsmk/grn:l,,s.htrn
J,ocl 1oo,, I. /\ <-cesset
on ' - .
1
M11 ,,,,y, M"'"'. "Ptto 11,11,, Choice mul L"".C".i ty Risk i" .the L"'.' '","'"'.'.~,:, h,; 20 J4, 2 United States Ccntrnl lnkll1".; t 1 "1tions/thc-wo1 ld-L1 - /. 1 I! !l, London.
e>am i,,,,,, "" <tl the I t,:1 Ettgl t:h Jntttmc, / """" ,,, / / 1,,.,,,,,,, 1, ""''", Jkcc !,le ,,' /librnrypu11c, / ')'11h.11,10 , . . "00~
https://www.c1<1,!,.0Y . . / ///' The /,()11(/011 01 .. : ''comp1d -'-' '
~~
n-
__ :,- 758
__ . .. ,. . . .. . . . . , ., ., Shoulr /Re1e11
. 20 I (1. .. . , UII(/ frudc 1111, /er fd11a1
, , l ritish-history.ac.u'
l"/rcpo1t .,1spx.
Mltmky, Mtssiw, A"'K If< 11,,,,,, , To,,1,,,,, IV!,, tiu 1/,t """'""' ,1 "'""ls of lit< I '""" .1,,o Unwin, GeorgeJ (ed.), /-111~111,l 1v1ilablc at: http://ww\\. i l) l t Policy in France,
/o l'a.st, Cam bddge: C"mbtidgc U,,i ,c~IJ y Pees,, 20 I 5. l ,,i itt At"'"'' (icor".C l nw1n, 1918' , 9,- 7 ()L 1(
,,'
. M _. t iml (iovcrni rn:nt cl

Mlt<lwtt, K,i, fames, '""I

Mm, fl. Wcidcamic,, "The llacittg Csisis am[ the <i,wt ' . , C
!\cccsscd 011 ol
1
u I J\U"USl
b -.
), j"
W 'ir The 111a 1 '
lCl'll di 1,c '
q . I I 19. Ninc'lecn -
tl
Mc hd<twa ttl' the, I 8')0:," J,,,,,.,,,,, <ii F, ''.'""" '.': !!;,,,,, ,,,
J,,,,, 2008, i,8:2, 46 2 Ncgot ittbihlY ''."':md Ve Ide, Fran(,'.ois
" l',., am I Dw1d
- ' . . R. 1 ,n,ic
c / !is/01:r,
, [VI ,in: h l 9'P - -S:ovcrcie.n
l_, , De l R c '
"Jl'1y111c11t in
M,,,,,.,,, .lttha Ii., "lh, Mltc,al Ongms o/ the I matwml Usmy, Rcttk:,' "'"'"'""' . ,hi
t 7'6-17')_,
1"/
,
1do/J,,01r
""'.? ', ,
mi ('dihk Crnrnm
t 'nts 'lllC,
""
1
.',i,o,, (t'J:2,
,
J58
:-;711
.J, . , tl4 '"""""" t:
I
,np:
1
/'
,
,,,,,., """'""" !!;""':t' I/,,, itw, Scpt,m he, 200J, 25 :J, 505 562 . . I G,p!lttl J, /,g Vizcarra, C1talina, (,u.i '. 1.. WIiiie / fist or\', June - .. : . c" Octohc:r I 0, _(
Ndikttttmatt, l.cm,c,, rnul James K. llnycc, A/dn, \ 0,/;,,m IM,1,, //o Fomg" '""''' "'" . hi ,, ; umaf of cc o, ( I lll'C) ln1t1,1 11v , I (i N
0
Crnttt:ey Pen,, , o I I It, 1 ll'rn" Crnmny , I "Ktb ""'"''- 0 . flt'/ "/tdh,,. "
/1/,,! """"'"'"!, 1,,,,,,1,,,,, Zed "'.'"" 20 t/ . .. . . .
,hull1;,,,,,:, <if . .. , World I lank, 1 leavtly m/~ ~~/dcbt/bricl1/hipc. !\cccss'j'.//n;m and the I !is/on' ,r 1
Oskclmmm,I, Jmtrn. at'<! l'm,sck I ttm, I kc, !h, I nm1/w """"'" of lit< fV,,, I,/ ,I /,/, , 1, www.worldbank.org/en 1 op / 'I' /Jehl: I /w111/to11 .. , . c .
0
. . , / / !ll/'IIUI, July
N;,,,,,,,,.,,ll, (',,,,,,,,.,., Pcittttm: Ptfotos, Uttiw,sit y P,c", 2014. , I K. GI.' 1 WrivhtRobcrl.. , ,. OicNut1011un,,
lX . ,,~
l)f1L1lts(l8--t_), "IJ,,Jf,'ill<< ,r
l'tttb, fames M., -- A,,,,,,,,,cs M<td<rn c,,,,,,,,, 0 v:1rli: Mc(iraw-llill, 20(' 1, !ru11tcy (2011), Michigan c'
'' m ' lool'!y
' . " m' W,11mm N. (',o,'lZJll'lili1
' 1' ,li1l,,,.,, (t<
'171/il Zweig, Jason, l) e t10 . it hks >an,
"""'""'"""
l Icd,. ), T/,,, ii,;g;,,, "i Vi,1,,,, Tlw 1-;,,,,,,,;,,1 htmn ,,,,;,,,,, that Orn<,,/ ' '"' J 22,2013.
\1<1l'kcts Oxi'ord 0:-Jord Univcrsit.y f>1css 1()0'" 7()7- 714 _ 1.. j( chJJIC
, , , _ , ", -
Rtdfo,, Ktm ibett, 'The IM I'\ S[) RM - Simply llisttst,,,,,, Rcschcdlittg M"attgcmrnt '
,1, - -- ,
"'<Ch!IS,
,,,
. ,,. R,o,h''"'
1
(1

mul JTaset ~ '"""" I'd').

Sm.01,,, n,ht nt tiw('m,m,,,,/, Ci,ull,,,,,,., ,,,,,1
I lit< Ihm/ It,,, /,I /)t'ft< ( ,,,.,,, O>lmd: O,i,wd U"'"""Y Pees:, 2006, 246 266
I',"'"''" ' 1' /iO
1
, ,.;ol Swl>t
)".:111 '-armen M ., --,1 1e !,eturn o,,. l1nanc1a
' Irnr,t ', " ' I Repression,
' " ll_anquc ce
I ['1,"lllCC , /< //IC/II ,.
11 I/,,,,;,,,,, A r,il 20 I 2, N" 16,.\7 -48. , ,, f(cd"
""'. I,,,,.t , (' '" "''" M " J """ I
\ I'. I('<cgtttd, """ M. llcca j So,,,,,"'
-,,_ . , m,m<
j" ' 11!
, Re!Ji'CSSIO ,,/
I,,,,,,,,,. "'" I n,,,,,1,,,,,,,,,,,t,J ""' 2tll I, 22 21,. . , ,, ,1,,,,, ,,,,!
Rcit<htttt, "'""'"' M , Vittm Rcial,ao, mttl KCtmcth R<tgnl{ "IJsli>tg wttli D, t, .,,
1,,,,,,.,,,,,;,,,,,,, F, ,,,,,,,,,it.,, 2015, %, S43-S55. . . h _p,,,,, c,p, '
I
Rciahn, C,,,,c,, M., m,d Kmcth S. R<tgoll, "Sittl llollwlt mttl the 'l'arndna' nl Rtch-t<> .
. 1 ttws, " '.I,,,,,,.,, ,,,, /'"'""'""""' ,.,,,,,,, Mt<y 20114, 'l4: 2, 53- 58. . r ,,,,,.ial /.,'1/h'
Rcmhttct, C""'"" M , ,,,,,1 K<tttt<th I{,,,,,
IT Tltt, 7ittw i., /Jif/in,,,. lilcltt c,,,,,,,,,,, "! "' .
Pti>t<ctmt: P,itt<<ttta U,,;,,,,ity Pees,, 2IIO<J. u ' ,, ,, , , r,,,k Tit<",:
' l\

Rciahttct, c,,,,,,,,, M , "'"' Kettacth S. Rttg<tll, "flcbt, Citttwtli rnttl the Attstc,ity llcbtttc, N," ,tls-attd-th<
A p,il 25, 211 l3, "'""" hk ttt: http://www. ttytl mcs.,,n/20 tJ/041261 opi" itta/dcht-gt<rn ,,
'S""tt y-dcl,,tt, httn I''_ ,- II. AcssI m, Xt h Aagttst 201/,. ,, . ,k ittg< P"i"
Res tthm1, l """" M , K,,,,,,t h S. Rttgttll: ttsul Migttcl A. S"'"""'"' "llcht Itllolcrnttcc, """ 1.
I ,,,, /in,,,,,,,,,,, ,1, lisit,, 2ttOJ, I, I 74. . . ,,rid'"''
,
"'"" 11, I'"""" I' '"''I ., 'C<"""'
Zct1cl,,y,
, I
"llattknsptcy /'me,,,.,. , sosgo,.
lt:w. . .. J\ ! I 1sto Y ,, . ,
!',,,,,,,.,,
~
1
t <J 76 2t1111," I AW St<i// 2002, 49: .l, 4 70 5117. . . . I , ,cd I II, "
R""'", I' pli tt<i m, 'Tl,c s,,, ictic, "1 tlic Bnh "'"' tbc Pens,, i tmd 1 hci, llcttli ag., wtth In \ L<"'"'"
Ci ""['.< Um' i " IC< I [, Fi,,,,," < a," I h,,,1,. ",,,1,,, l'dwm d Iii, Tiu I,,,,,,1,," I "!' s,, h, i, /s' ',!I /3 ;i; ,. 3) O!i
I;,,,,,, Uttwi ", I <J l S, <JJ -I J5, """""" ,tt hop //www.b,it i,h-hi,tttcy.,,, ,,k/,,p,,,t,,,p, irnmi . 8,
A<md <it, Sth Attg>t,t 201/, /1 Ii"""""
S,1ck, !\kxandcr N., (cs c/fi,ts des tru11.1"/im11utio11.1 dn c:rurs .111/' /e111.1 dcttc.1 ;mhli<;11cs et mi/l'l'S ,~
Ji,,mwil, /'ads: Rtt<il Si ,,y, l'!27. 1 & I'"
O .,,
Sa, Ith, Mm,, ,t" /,,9u1,,, ;,,,,, 1/,,, N,,,,,,,, ,,,,,1 / ,,,,.,., ')/! f,,, Wcn/1!, ,,l Natinm, Lm,d,m: Met lntc k
jtil, i'lOt . . , . . .. ,, . ,. ,,,,. N,wY"'
Stc1111nc[/,, (,reg, 7/w Rl('/1est Mun Who her l,11cd: 7/ic !.,je und l 1111cs of Jucoh l 11;-,,~ll'
Si"'"" & Schttst, 2015. . . .. (' ,,,,,,,.;,,,
Tonv, Michael, Rc;}//fulio11 unc/ !11tcmatiu11u/ CooJ)(Tution: Sovl'l'eign Ucht ucmss 7/Jrcc '
i'rinccton: Princcton University Press, 2007.

,,,,