Sovereign default  

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A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. Cessation of due payments (or receivables) may either be accompanied by formal declaration (repudiation) of a government not to pay (or only partially pay) its debts, or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, failures to abide by the terms of bonds or other debt instruments. Countries have at times escaped the real burden of some of their debt through inflation. This is not "default" in the usual sense because the debt is honored, albeit with currency of lesser real value. Sometimes governments devalue their currency. This can be done by printing more money to apply toward their own debts, or by ending or altering the convertibility of their currencies into precious metals or foreign currency at fixed rates. Harder to quantify than an interest or capital default, this often is defined as an extraneous or procedural default (breach) of terms of the contracts or other instruments.

Examples of national bankruptcy

A failure of a nation to meet bond repayments has been seen on many occasions. In 1557 Philip II of Spain, defaulted on debt several times, had to declare four national bankruptcies - in 1557, 1560, 1575 and 1596 - becoming the first sovereign nation in history to declare bankruptcy, due to rising military costs as it had become increasingly dependent on the revenues flowing in from its mercantile empire in the Americas. This state bankruptcy threw the German banking houses into chaos and ended the reign of the Fuggers as Spanish financiers. Genoese bankers provided the unwieldy Habsburg system with fluid credit and a dependably regular income. In return the less dependable shipments of American silver were rapidly transferred from Seville to Genoa, to provide capital for further ventures.

In the 1820s, several Latin American countries which had recently entered the bond market in London defaulted. These same countries frequently defaulted during the nineteenth century, but the situation was typically rapidly resolved with a renegotiation of loans, including the writing off of some debts.

A failure to meet payments became common again in the late 1920s and 1930s; as protectionism rose and international trade fell, countries with debts denominated in other currencies found it increasingly difficult to meet terms agreed under more favourable economic conditions. For example, in 1932, Chile's scheduled repayments exceeded the nation's total exports.

• Denmark 1813: Danish state bankruptcy of 1813
• United States 1933: confiscation of gold in private hands (Executive Order 6102) to be later revalued from $20 per ounce to $35 per ounce.
• United States again with the 1971 repudiation of the dollar-gold convertibility (the Nixon Shock) considered by many a de facto national bankruptcy.
• Russia: 1998 Russian financial crisis
• Argentina: Argentine economic crisis (1999–2002)
• Zimbabwe: Hyperinflation in Zimbabwe
• Ecuador defaulted 2008 on one of its bonds

See also

• Asset liability mismatch
• Sovereign bond
• External debt
• Currency crisis
• Financial crisis
• Balance of payments
• Vulture fund