Sovereign Debt: Pointers from the Past

Anousha Sakoui has written a very interesting Analysis article in today’s FT on the experiences of some top European officials during various Emerging Market debt crises during the last 30 years: you can read it here.

38 replies on “Sovereign Debt: Pointers from the Past”

@Philip Lane

Oh for the good ol’ days of pristine Sovereign Debt, unpolluted by the cowboy banks and their fellow travellers in Pee_Dee/Fianna Fall

EuroIntelligence this morning is worth a read ….

The Brady Bunch for Greece, and Ireland? And 30 yrs to pay …

Dr Merkel ‘pussyfooting’ … Hmmm …

Citizen Adams creates a bit of a stir …. But heck, what do Roubeni, Rogoff, Gross, Soros, Krugman et al know anyway …

& from the FT piece ………

“There is a rationale to delay if you really think you can make it through, but there is a tendency for delay unnecessarily, because the costs are exaggerated by financial markets,” … “If debt is going to have to be restructured, it’s better to be sooner than later.”

Citizen Stiglitz joins the conversation.

I concur; and so does Blind Biddy, not to mention Patricia the Irish Sovereign_in_exile.

If they don’t restructure before they are forced to do so by means of a devaluation the whole political system is likely to collapse. Labour and FG are just as know-nothing/no balls as FF.

I see today the Govt is borrowing €3.5 bn with €750 m for Anglo bondholders and the rest presumably for groceries.

John McManus fights the good fight for small firms but who in power is interested ?
“Getting these businesses – which number in their thousands – back on their feet and their finances on a sustainable path is clearly integral to economic recovery and job creation. Some evidence that AIB and Bank of Ireland are following through on this promise will be required.”

Still no sign of the NTMA roadshow. Maybe they got stuck in Cairo?

Are we at the beginning of the end-game?

The EU still seems to be struggling to devise a legally bullet-proof course of treatment when confronting so many different, but life-threatening, pathologies. At one end of the spectrum we have Greece – a very dodgy sovereign with some banks bolted on – and Ireland – a huge and generally insolvent banking system with a potentially viable sovereign bolted on – at the other. Spain and Portugal are at different points on this spectrum – and Belgium and Italy have their own special places.

It’s difficult enough when dealing with just one country – as indicated in the FT article – but dealing with this menagerie of basket-cases is well nigh impossible if the focus is on a single, all-embracing strategy.

Can anybody seem to make the connection that it is the countries which did not need to get into fiscal debt during the boom years that are suffering the most from this crisis.
This bankers idea that the money supply and debt loads needs to be linked has to go.
Europe is banked to death – if they were running around a Scottish estate in such numbers they would have to be culled by the deer.
Irish and Iberian debt issuance’s did not add appreciably to the money supply in the first 5 to 6 years of the Eurobank disaster experiment.

There was a deliberate action to hyper inflate asset prices so that banks could extract yield from the proles – very little real capital creation occurred other then Brussels transfer payments that built roads ,this is looking a bit 20th century now that the middle east is possibly waking up from its slumber.
Soverigns have to be given or take ? the ability to create debt free money on condition they use this for energy independence projects.
This is beyond urgent now – it needs to be done yesterday.

@ KC: “Irish and Iberian debt issuance’s did not add appreciably to the money supply in the first 5 to 6 years of the Eurobank disaster experiment.”

Oppps! Debt IS money Keith. Not the sort in-your-pocket money, but money nonetheless.

Credit and Debt are inseparable siamese twins: Credit is virtual, Debt is real. You have to use real money to pay down real debt. Money is destroyed. Money supply shrinks: Deflation. Default has same outcome, ‘cept you are involved in QE. You are re-filling the slurry pit as fast as you drain it.

Water always flows down – gravity and all that. Money flows upward. Excrement floats!

“… little real capital creation occurred …” Spot on!!!

What did the man say? “Greed is good!” Yes, but yield is better!


… from The Governor’s office – projection for 2011 (non)growth rates

GDP +1.0% GNP -0.3%

@ 2_of_7 (aka Mr Dukes)

Don’ pay the ferryman today … he is ‘UNSECURED’ … citizenry can make better use of that €800 million plus …. such as heating the flats in Ballymun or providing decent care to terminally ill children.

@Brian Woods
I was referring to fiscal debt issuance – the goverments got their money chiefly through taxing the private credit creation during the boom.
Under a pure debt system that we have today – it only matters what you spend your debt on and what or if it makes a yield (the low yields over the past few decades are not stopping the rise in the debt burden) – the private credit creation in Iberia and Ireland chiefly spent their credit on consumption that was classed as capital – such as housing.
The dramatic rise of debt / money during the monetarist years was a reflection of the fact that the system invested less and less in capital creation to keep the money supply expanding.
To my mind energy is capital and nothing else at least in the physical world although the human mind is also a resourse of sorts that can beat entropy
All debt is money and money is debt in this world but they do not have to be linked.
Ben Bernanke under QE 2 is effectively issuing money now as interest accrued goes back to the treasury – this is a break from the norm of sorts.

“But, similarly to the Palestinian Authority viz-z-viz Israel, do we have ‘partners for peace’ in Brussels, Frankfurt, Paris and Berlin”

the PA analogy is a good one. Say Ireland is the PA and Israel is the ECB. The ECB has all the power and Ireland like the PA is chronically weak and dependent on international donors. But that was last week, before Mubarak lost control and suddenly Israel is down to a single ally in the region, And all is changed now. At least for the PA. But not for Ireland.

All of these crises involve too many know nothings dictating policy.

The SF policy of unilateral action is seen as fraught with danger:

The eurozone “has a strong desire to ensure that however the process plays out, it is very different to Argentina’s restructuring”, says one sovereign debt adviser. “Argentina from 2001 to 2010 is the paradigm to avoid: they did almost everything wrong. They defaulted, turned their back on the IMF at an early stage, jettisoned their currency board, converted bank assets and liabilities asymmetrically, adopted an aggressive position with their creditors, were excluded from the international markets and spent many years defending extensive litigation.”

@ KC: Many thanks for putting me straight.

I was thinking about the general principle, rather than a comparison of outputs from separate sources. I concur with your comments.

“To my mind energy is capital and nothing else at least in the physical world although the human mind is also a resourse of sorts that can beat entropy.”

Like this! I tried ‘selling’ the bit about energy to some economists of my acquaintance. Blank expressions!

Ever come across any significant discussion of energy matters (other than Supply-and-Demand and Substitution guff) in recommended undergrad micro/macro econ texts as used in our colleges?

Thanks again,


@ zhou_enlai Says:

“The SF policy of unilateral action is seen as fraught with danger”

Would you prefer to have a leg amputed or to lose one kidney and a thumb ?
The ECB are betting everything on a policy that is doomed.


The ECB/EU position is dynamic. They are preparing the market for restructuring of senior bank debt / sov debt and other initiatives including repurchase of bonds imho.

EU/ECB’s biggest fear = contagion/panic
Therefore EU/ECB obsessed with avoiding surprises in the market.

Kaminsky, Reinhart, Vegh “THE UNHOLY TRINITY OF FINANCIAL CONTAGION”: “Throughout the paper, we stress that there
are three key elements—an abrupt reversal in capital inflows, surprise announcements, and a leveraged common creditor (the unholy trinity)–that distinguish the cases where contagion occurs from those where it does not.”


that quote was from an advisor to sovereign creditors- of course Argentina’s default was a disaster for them!

further on in the same piece,

“While much of the script is still to be written, another lesson learnt is that while it can be painful, restructuring can be a path to recovery. Joseph Stiglitz, the Nobel laureate economist, points to the experience of Argentina, in spite of its messy default, as proof “that there is life after restructuring”: in the years that followed, the country experienced rapid growth.

“There is a rationale to delay if you really think you can make it through, but there is a tendency for delay unnecessarily, because the costs are exaggerated by financial markets,” Mr Stiglitz says. “If debt is going to have to be restructured, it’s better to be sooner than later.”

@michael burke

I agree the EU/ECB are being too slow about getting their sh_t together. The IMF think the same.

However, EU/ECB failures do not necessarily make unilateral action a better option. although that point could be reached.


“The ECB/EU position is dynamic. They are preparing the market for restructuring of senior bank debt / sov debt and other initiatives including repurchase of bonds imho.”

Maybe but the market doesn’t seem to think so, given current 10 year yields.

What many people seem to fail to grasp – and what those on the left are idoleogically incapable of grasping – is that most sovereign bond market participants are on the same side as taxpayers in all of this. Yes, of course, there are shorters and vultures who will make a killing when there is mayhem – and this gives them every incentive to cause mayhem. But their potential to cause mayhem is, more often than not, occasioned by governments and their instititions seeking to suspend disbelief and creating a gap between the perception they wish to convey and the economic reality as viewed by market participants. Investors of ‘good money’ abhor this gap and the uncertainty it causes – and it is in the interests of both these investors and taxpayers that this gap is closed.

As Zhou has noted the EU/ECB is moving far too slowly to close this gap and stretching the peripherals on the rack to deflect attention from their tardiness – and the underlying problems they are trying to conceal.

But there is a limit to the elasticity of the tendons and ligaments being stretched.

Default or hyperinflate or something in between – these are the only choices.
Although will this be under a petrodollar system like a 1980 time warp on steroids or some new monetory system.
The Fed is treating the dollar as money rather then a currency while the ECB still recognizes at least to some extent that the Euro is but a currency.
The Anglo central banks appear to have chosen the inflate button although they could decide to reverse their positions.
But we need to understand what happens when a central bank creates its own money rather then bank credit.
This will destroy the typical M3 sensitive assets such as houses and inflate the basic stuff of life.
It would have been best to destroy the shadow bank sector directly through default which was dependent on M3 growth rather then people lives which are dependent on the value of paper and deposits.

Anyhow it is always a question of who pays.

We shouldn’t be confused by the ‘facts’!

The FT Jan 31, 2011:

French and German banks have the largest exposure to Greece, according to the Bank for International Settlements, with €59bn and €40bn respectively as of last September. German banks are also among the most exposed to Ireland, with €154bn outstanding.

The FT Nov 25 2010:

The Bundesbank also played down German banks’ exposure to Ireland, estimating direct exposure at about €25bn. This is much lower than the Bank for International Settlements estimates, which suggested about $140bn.

Officials said the difference reflected some indirect exposure such as business routed through Dublin-based special purpose vehicles or subsidiaries.

@Paul Hunt

“What many people seem to fail to grasp – and what those on the left are ideologically incapable of grasping – is that most sovereign bond market participants are on the same side as taxpayers in all of this.”

A lot of people just don’t have access to the right quality of info to be able to comment authoritatively on this. The Irish Times is supposed to be the paper of record but you won’t learn much reading it since it has reverted after a brief blip in November to defending the status quo. I thought Deaglán De Breadún’s hagiography of Micheal Martin last week was desperate.

I don’t get why the holders of sovereign debt are doing nothing while those holding bank debt are creaming the money and ensuring that in Ireland’s case at least the sovs are going to get a haircut. Or am I missing something? A sov default would be a tragedy for Ireland. A bank default might not be. When do we get to play the broken field rugby?

You see if we default on bank debt – London / Paris / Frankfurt will become empty wastelands with no function.
We just live in a zero sum, zero capital creation world – the power centres are desperate to just take whats remaining to have another decade of bliss.
There is not a ounce of vision in the entire west – it is bankrupt both morally and financially.

@Paul Hunt

“What many people seem to fail to grasp – and what those on the left are idoleogically incapable of grasping – is that most sovereign bond market participants [sic] are on the same side as taxpayers in all of this.”

C’mon Paul! From Joe Higgins, through SF, to Joan Burton and others in Labour this understanding has been more than amply demonstrated for quiet some time on the ‘Left’. No question, and no need, for any of these to signal a default on ‘Real Sovereign Debt’ – and all have clearly noted the distinction between Bondholders of Insolvent banks and Bondholders of Irish Sovereign Debt. I would like to see a little steel added to the Labour position on this Conflationist Fallacy. The so-called ‘Roight’ in FF, FG appear to lack such understanding – and it is left, no pun intended, to persuasive ideological right commentators such as Cormac Lucey to make the case. The blind supines lacking all understanding are on the Right ……….


Mr. Bond might be able to offer some enlightenment on these matters, if he were so disposed. My sense is that the market for peripheral (and other vulnerable) sovereign bonds may be quite thin. The shorters may not have enough ammunition to cause the kind of fireworks they would like – or some may fear (a la Warren Buffet) the tide going out and revealing their nakedeness. Investors of ‘good money’ may be holding fire on the basis that they would take some fairly heavy hits to force the pace and that this might be foolhardy as the EU/ECB will get its act together eventually. It is certain that officials in Brussels and Frankfurt are in continuous contact with market participants. Who knows what’s being said?

In some sense this is a ‘phoney war’ as the big guns have’t been wheeled out yet, but the low-level mortar fire is causing havoc in the trenches where the peripherals are huddled.

@ Paul Hunt

For me it is a question of when the ECB is likely to get its act together versus how soon it will be before the banks are doubly incontinent. It is like watching an elderly relative being taken over by dementia in the absence of state assistance which isn’t due to kick in for another 18 months. Will the patient make it? Nobody at the ECB really minds what happens to Ireland anyway.


Reading up on a bit of democracy and law; it appears that a ‘guarantee’ entered into by a ‘bunch of lunatics’ has zero validity in international law. As one can now easily gather more than sufficient empirical evidence of such ‘lunacy’ within the PD/FF/GP administrations all that remains is to have them sectioned and to declare the so-called ‘guarantee’ null and void. I suspect that Genuine Sovereign Bond Holders and Irish citizens will be prepared to take the relevant action.

My apologies to all genuine lunatics.

Things will get a loss worse before they get worse.

Last week the ESB discovered what a lot of Irish firms have been experiencing in the harsh world of the capital markets: there is a steep price to be paid for being Irish. The ESB secured ratings from all three major agencies in the lower investment grade bracket – strong enough to attract mainstream funding for its €6.5bn capital expenditure programme, but closer to junk status than to prime. Perhaps more significantly, Moody’s and Standard & Poor’s, the agencies with the most market influence, put the ratings on negative outlook. The ESB is a state-backed quasi-monopoly in a heavily regulated and protected infrastructure market, so why are the ratings agencies concerned that its creditworthiness will get worse? The difference is, it’s Irish. As the ESB press release said: “The ratings outlook by the agencies reflects their respective positions on the Irish sovereign rating.”
While the state and the banks have been locked in a deadly embrace since the guarantee was introduced in September 2008, more recently the contagion has spread to non-financial corporates and SMEs as global markets look askance at the troubled Irish economy. The ESB is just one example of how Ireland Inc has changed from a mark of quality to a warning sign.

@David O’D,

We’ll get our knuckles rapped if we indulge in too much of this, but it is relevant to the thread. We have put ourselves in a position (yes, aided and abetted by others) where we are at the whim of forces beyond our control. What happens to us is unintended collateral damage while the behemoths grapple. We are similar to the glass knocked from the table during the arm-wrestling contest between the sovereign bond market and the EU/ECB. The arm-wrestlers are not unaware of our plight, but neither can afford to deflect attention to mop our worried brows. We need to make the best of a bad deal in the short term, so as to benefit from the changed circumstances when the contest ends. But it would be extremely unwise to do anything unilateral that would impact the course of this contest.

Labour is starting to play the game that it played from 1982-87 – Lord make me fiscally chaste, but not yet. There is no doubt that much of its increased support (reported in opinion polls) is from the broad public service switching from FF. It probably can’t help itself playing to this gallery. That is bad enough – and augurs badly for any possible governing cohabitation with FG – but any hint of claims that it will be able to enforce a major re-negotiation of the EU/IMF deal should be exposed as the delusion it is. There is huge scope for structural reforms which would lift the performance of the economy, but which Labour won’t contemplate. But if prefers fantasy-land.

@Paul Hunt

Yes – we are ‘small’ and ‘expendable’ from the perspective of the Big Mammoths. Yet, if this continues we will be (almost are) destroyed – and whereas I’m no fan of unilateralism in international relations – one must maintain the ability of a narky wasp to sting such recalcitrant Mammoths or Behemoths in their most sensitive areas- and remind them in no uncertain terms that we are still here – and that not all of us are fools.

Ergo, I maintain the ability to unilaterally launch the nuclear option where and when extinction is nigh …

Labour are in the best positon to lead a left and reposition a centre left/centre right alignment – and a small hard left and smaller hard right.

EU/IMF deal is due to lunatic bank guarantee – see comment above – I’m with leading international economists and Sinn Fein on this one.


There is always more to an ESB-related story than meets the eye. I’ll refrain from expanding lest I be chastised. But the general point about increasing corporate debt-financing costs is valid and relevant.

@D O’D,

Your preferred political alignment is a prize to be desired. Shame it has taken an economic cataclysm of this nature to prompt the possibility. And yet we envisage a factional combination in government with the factions sitting on opposite sides of the divide in most mature, developed democracies. We must be very slow learners.

@ DO’D: Your apology is gratefully accepted!

“Ergo, I maintain the ability to unilaterally launch the nuclear option where and when extinction is nigh …”

That’s known as the Sampson Project. Prefer the Master Samurai version myself – [Miyamoto Musashi]. Subtle, fast, terminal!

‘Suppose this was how it was in the olde days when the dinos were a tad chilly about their nethers and getting short of tucker. Threshing about.


You see the multinationals are dependent on cheap paper from the CBs and their commercial brethren – the multinationals were not necessarily more efficient then the state and semi- states of old unless you consider the decapalistion of physical and human infrastructure effiencent.
If you prevent the state from raising cash via artificial deficit rules and give unlimited finance to private companies they have to be close to useless not to succeed.
If the states of Europe take write downs on their paper before bank debt it will confirm a new feudalism rising in the west – except this time the Knights will not engage in anything except mock combat on the deck of some Mediterranean super yacht.
The ECB is the most anti republican institution created since the dawn of western civilisation – its role is to gut the state into little pieces so the delicate tummeys of the commercial banks can digest its contents more easily.

Its quite ironic that the banks – creators of the nation state should now be attacked with such ferocity , then again if a entity cannot produce a yield it is a nothing to these vultures.

“In spite of recent bail-outs, markets are pricing in a high risk of a restructuring for countries such as Greece and Ireland, in what would be the first default of an advanced nation since postwar Germany in 1948.”

At least in the Greek case there is no blanket guarantee to drag bak debt into the mix. I find it remarkable that there are still those among us who insist that we maintain the guarantees whose main purpose now seems to be to allow pople like Bini Smaghi to consider “bank” and “sovereign” as synonymous in Irelands case. Our priority now should be to (as David O’Donnell said) to scrap it. At the very least it would add clarity – a quantifiable debt horizon. There would then be a good chance that the lenders who were driven away by the terrifying prospect of lending to a sovereign who has guaranteed the capacity of a bottomless pit.

Who would lend money to a man who insisted on writing blank cheques to cover his neighbours debts?

The guarantee must be rolled back. It shouldn’t be difficult or problematic to explain that to our EU/IMF friends. The biggst problem will be explaining why it took so long. A referendum if need be but court overturn the simplest option.
I note (BTW) from todays news that our great legal system has succeeded yet again in, as the Dean said, “proving that back is really white”

A 35% negotiated haircut is par for the course. If Greece accepts then Ireland is home free.

The SF posturing will help in the negotiations particularly if they get more than 20% of the vote. Sadly I do not see much business know how in a combined FG-Labour effort. The same wink, nod, nudge, talking out the side of their mouths, cronyism, nepotism. Business as usual Irish style.

Widespread mayhem on the streets would concentrate their minds wonderfully. I do not see things getting totally out of control. We are in for a tough decade ahead, political instability is assured as the realization dawns that Gov’t has no choice but to tax more and spend less.

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