Investors have renewed their obsessing over the risk of sovereign default, as fear creeps back into the market that contagion will lead to a replay of the financial crisis and the return of a recession. While sovereign debt defaults are frightening, they are actually quite common and may not lead to the worst-case scenario that many are expecting. Here are seven facts about sovereign debt defaults that might surprise you.

TUTORIAL: Credit Default Swaps: Introduction

1. PIIGS
The PIIGS countries - or Portugal, Italy, Ireland, Greece and Spain - are on everyone's watch list as having the greatest risk of sovereign default. These five countries have a mixed historical record of sovereign default over the last 200 years, with Ireland never defaulting on its obligations and Italy only once during a seven-year period in World War II. (For many emerging economies, issuing sovereign debt is the only way to raise funds, but things can go sour quickly. For more, see How Countries Deal With Debt.)

Portugal has defaulted four times on its external debt obligations, with the last occurrence in the early 1890s. Greece has defaulted five times and has spent a total of 90 years in this status since achieving independence in the 1820s.

Spain holds the record on the PIIGS list and has defaulted six times, with the last occurrence in the 1870s. If you extend the date range back another three centuries and start in 1550, the default count rises to 12.

2. Pristine
There are a number of countries that have pristine record of paying on sovereign debt obligations and have never defaulted. These nations include Canada, Denmark, Belgium, Finland, Malaysia, Mauritius, New Zealand, Norway, Singapore, Switzerland and England.

Don't think that these countries skated through the last 200 years without financial problems, because endemic banking crises were a common occurrence. England has suffered 12 banking crises since 1800 or an average of about one every 17 years.

3. The U.S. Has Defaulted on Debt (Technically Speaking)
Although the conventional wisdom is that the United States has never defaulted on its sovereign debt obligations, there have been some instances that may qualify under a strict and technical definition.

In 1790, the United States passed a law that authorized the issuance of debt to cover the obligations of individual states in the union. Since some of this new debt didn't start paying interest until 1800, some purists consider this a technical default.

Many issues of U.S. government bonds issued prior to the 1930s contained a gold clause under which bondholders could demand payment in gold rather than currency. In 1933, President Roosevelt and Congress decided that this promise was against "public policy" and obstructed the "power of the Congress" and ended this right. The issue was litigated and ended up before the Supreme Court, which ruled in favor of the government.

In 1979, the government could not make timely payments on portions of three maturing issues of treasury bills due to operational problems in the back office of the Treasury Department. These payments were later made to holders with back interest.

4. Ground Zero
Ground zero for modern sovereign debt default seems to be in South America and Central America where Venezuela and Ecuador share the dubious honor of 10 defaults each. (For related reading, see Why Bad Bonds Get Good Ratings.)

Brazil, which today is one the fastest growing of the emerging economies, has defaulted nine times, while Costa Rica and Uruguay have disappointed foreign investors nine times as well over the last 200 years.

5. China
Another oasis of financial strength today is China, which has trillions of dollars in reserves and suffered only marginally during the recent recession. China has defaulted only twice, both times during times of external and internal conflict.

6. Confrontation
The Western Powers sometimes reacted with military force when a country decided not to pay back money that was borrowed. In 1902, Venezuela refused to pay on its foreign obligations and after negotiations failed to resolve the issue, Britain, Germany and Italy imposed a blockade on Venezuela.

The conflict escalated quickly and a number of Venezuelan ships were sunk or captured, ports were blocked and coastal areas were bombarded by the Europeans. The U.S. eventually intervened to mediate and after several years of negotiation Venezuela combined its outstanding debt into a new issue, added back interest and made payments until the issue matured in 1930.

7. Revolutions
Some sovereign defaults are intentional and are not necessarily due to a lack of financial resources. In February 1918, the new government in Russia repudiated all debt issued by the previous Tsarist government. Bondholders have long memories and this default officially lasted until 1986, when Russia settled with British holders of this paper. In 1997, an agreement was reached with French bondholders as well.

The Bottom Line
Sovereign debt default is a terrifying thought to many investors and the dread is only amplified in the current environment of financial gloom that pervades the market. Investors that examine the issue more rationally, and in the context of the history of such events, will realize that the global financial system has seen this before and survived. (For related reading, see The Risks Of Sovereign Bonds.)


Related Articles
  1. Fundamental Analysis

    Quantitative Easing Report Card in 2016

    Find out why quantitative easing has not worked, despite the best efforts of the Federal Reserve, and how it has fueled the national debt problem.
  2. Economics

    Economist Guide: 3 Lessons Karl Marx Teaches Us

    Read about three lessons that modern economic thinkers can learn from German philosopher Karl Marx, the founding father of communism.
  3. Economics

    How Bernie Sanders Has Avoided Big Money (Mostly)

    Bernie Sanders hasn't entirely avoided PACs with his fundraising, but he has gotten a lot of bang for the buck
  4. Investing News

    Obama Wants to Double Wall Street Regulation

    President Obama wants to double the budgets of the SEC and the CFTC over the next five years.
  5. Economics

    Does Big Money Hurt or Help Clinton and Rubio?

    Marco Rubio and Hillary Clinton lead their parties in raising money from Wall Street. Is that a help or a hindrance?
  6. Fundamental Analysis

    The Evolution of Obamacare Since Its Inception

    Find out whether the Patient Protection and Affordable Care Act, also known as Obamacare, has lived up to its lofty projections from 2010.
  7. Stock Analysis

    The Biggest Risks of Investing in Lockheed Martin Stock (LMT)

    Learn about defense contractor, Lockheed Martin, its leadership within its industry, and how the company can stay on top as the defense landscape changes.
  8. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
RELATED FAQS
  1. How do mutual funds work in India?

    Mutual funds in India work in much the same way as mutual funds in the United States. Like their American counterparts, Indian ... Read Full Answer >>
  2. How much money does Florida make from unclaimed property each year?

    Each year, goods such as money, financial investments and physical property are either auctioned off or appraised before ... Read Full Answer >>
  3. Do mutual funds have CUSIP numbers?

    The Committee on Uniform Securities Identification Procedures (CUSIP) number is a standardized identification system used ... Read Full Answer >>
  4. How much money does New York make from unclaimed property each year?

    According to the Office of the New York State Comptroller, types of unclaimed property accounts include bank accounts, wages, ... Read Full Answer >>
  5. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>
  6. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center