Sovereign Debt Crisis

A mayhem to come?

I am going to continue on from where I left off on Tuesday. I am going to explain in more detail what a sovereign debt crisis means. In Tuesday’s piece, I noted that

Sovereign debt crisis means the inability or unwillingness of a government to pay back the principal + interest of the debt (bonds) it owes to domestic and/or foreign investors, i.e., default. Domestic sovereign default implies default on a debt held by domestic bondholders, while external or foreign default implies default on the foreign holders of government bonds.

I also presented a figure from This Time Is Different by Carmen Reinhart and Kenneth Rogoff, which presents the share of countries in either external default or debt restructuring.

Share of countries in external default or restructuring. Source: Lindert and Morton (1989); Suter (1992); Purcell and Kaufman (1993); Reinhart, Rogoff, and Savastano (200a3); Macdonald (2006): and Standard and Poor's

Extending the concept a bit, a fiscal crisis can be identified by four criteria (see, e.g., Kerstin Gerling et al.):

1. Credit event (foreign default).

2. Exceptional official financing (IMF).

3. Implicit domestic default (monetization, domestic arrears).

4. Loss of market access.