Default and the Nature of Government

by Alex J. Pollock

Wall Street Journal
March 14, 2012

Twenty-first century economists, financial actors and regulators blithely talked of the "risk-free debt" of governments, and European bank regulators set a zero-capital requirement on the debt of their governments. The manifold proof of their error is that banks and other investors are now taking huge credit losses on their Greek government bonds.

The only question is why anybody would be surprised by this. The governments of country after country defaulted on their debt in the 1980s, a mere generation ago. In a longer view, Carmen Reinhart and Kenneth Rogoff count 250 defaults on government debt from 1800 to the early 2000s. As Max Winkler wrote in his instructive 1933 book, Foreign Bonds: An Autopsy: "The history of government loans is really a history of government defaults."

Winkler chronicled many examples of government defaults and repudiations of debts up to 1933, including those of Austria, Bolivia, Brazil, Bulgaria, Canada, Chile, Ecuador, Costa Rica, Germany, Greece, Guatemala, Latvia, Mexico, Peru, Romania, Russia, Turkey and Yugoslavia—as well as those of a dozen U.S. states.

Among the financial history lessons now forgotten is the European sovereign debt crisis of the 1920s. The losers of World War I were flat broke. But the winners, principally the governments of Britain and France, had vast debts they could not pay.

More