Sovereign Default Fairy Tales and Facts - Take Your Pick

The history of the world is full of sovereign defaults - are they really as fearsome as some would have us believe? Hardly, though default avoidance could heighten the short-term pain.

This morning I had the pleasure of being on CNBC together with a pundit from a major investment bank. He claimed that if Greece went bankrupt then no one would lend them any money and it would leave them without trading partners. I countered that this would happen anyway if we continue to ignore the losses that creditors need to take on their Greek investments. Only through a Schumpeter-like “Destruction of Capital”, after all, can we give Greece a fighting chance to survive.

Why is everyone so afraid of a default? Are we supposed to believe we have banished them forever? History is full of nations going bankrupt – and in no circumstances has it ever meant a complete loss of trading, credit, etc. Quite the contrary - it's precisely the default and accompanying devaluation that often sows the seeds of a recovery.

Here, according to a Wikipedia article on sovereign defaults, are a few examples of major European sovereigns that have defaulted over the years:

* Spain - 15 times! (1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939) Isn't it interesting that it defaulted most often when it was getting "something for nothing" in the form of New World gold riches?

* England - a modest 3 times (1340, 1472, 1596)

* France - 9 times. (1558, 1624, 1648, 1661, 1701, 1715, 1770, 1788, 1812)

AND now for the beloved BRIC countries:

* Brazil - 10 times inside the last 115 years (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986-1987, 1990)

* Russia – 7 times. (1839, 1885, 1918, 1947, 1957, 1991, 1998)

* India (1958, 1969, 1972)

* China (1921, 1932, 1939)

See the complete list of sovereign defaults here (same as above link), which includes a list of 39 African sovereign defaults, 26 Asian defaults, a whopping 91 European defaults, and for the Americas, a stunning 154 defaults.

Wow! Could it be that some of the “competitiveness” the BRICs and other countries have today is based on episodes of cleaning the slate and declaring a new beginning? Why must we hang on forever to old debt and past mistakes? Down with the pro-zombie Keynesians and up with the lessons from history!

Also…please, please let this talk about whether or not the ECB is doing QE stop right now. The ECB’s balance sheet is up 38% since July 1st of last year. The same period saw the Fed’s balance increase by one per cent! Talk about printing money. It seems that the princess Merkozy did indeed kiss the frog and it morphed into a hopelessly indebted Club Med Prince. And then they lived happily ever after? My compatriot Hans Christian Andersen would have been proud of today’s politicians and their penchant for perpetuating fantasy.

The real problem here? Domestic banks in the PIIGS countries are fast concentrating their exposure to their own sovereign’s debt, and this is increasing the leverage in the system and the risk of systemic contagion. The LTRO is merely a massive dose of morphine applied to reduce he pain from the mortal wound that the EU has inflicted on its finances over the years. It has succeeded in reducing the pain, but the problem remains that ever increasing doses will be needed to hide the pain until that wound kills the patient if the EU refuses to go in and perform emergency surgery.