by Jerry O’Driscoll
Summer reading is eclectic and before getting to my second installment of notes on This Time is Different, I want to recommend a non-economics book. A Chance in Hell by Jim Michaels is a riveting account of how the military and political situation turned in Anbar province in Western Iraq. It is first and foremost an account of courage: that of a minor Sunni Sheik, Abdul Sattar Bezia, who led an uprising against al-Qaeda, and the American officers, led by Col. Sean MacFarland, who backed him.
Together they snatched victory from defeat in the battle for Ramadi. The much-discussed troop “surge” came only one year later, and Ramadi was already largely won. It is questionable whether the elements that made for that victory can be replicated in Afghanistan. But reading this book is the best way to understand what did happen.
On to financial crisis. Reinhart and Rogoff divide financial crises by type, dealing first with sovereign external debt defaults and then sovereign domestic debt defaults. Banking crises and the current meltdown come later. There have been at least 250 sovereign external debt defaults during 1800-2009 and at least 68 cases of domestic defaults in the same time period. They hedge on the numbers because of the lack of good data: “Government debt is among the most elusive of economic time series” (34). n
Few countries have not defaulted on external sovereign debt in their developing phase. The list of “default virgins” is short. I counted 17 in their sample of 66 countries. The U.S. is on the short list for that category, but, of course, it defaulted on domestic debt in the 1930s with the abrogation of the gold clauses. Sovereign debt defaults are unlike corporate bankruptcies in that nations default out of choice, not necessity: willingness to pay not ability to pay determines the decision to default. There is some evidence that countries are quicker to stiff holders of external debt than holders of domestic debt. Today’s debt structure, with foreigners holding large amounts of U.S. domestic debt, blurs this distinction. Reading the historical record certainly calls into question economists’ designation of sovereign debt as “riskless.” It is anything but that.
Banking crises and sovereign debt defaults interact. The former cause sharp falls-offs in revenues and increases in expenditures. That makes debt default more likely. In the current financial crisis, they conclude that “a sharp rise in sovereign defaults … would hardly be surprising.” Pick your countries.
Defaulting countries typically restructure and provide partial payment. R&R recount that the earliest form of restructuring was called “bloodletting” – “French monarchs had a habit of executing major domestic creditors” (87). Riskless, indeed. They provide a fascinating account of “The Forgotten History of Domestic Debt and Default.
Next: the history of banking crises and the current mess.