Wall Street Journal article and the “Database of Sovereign Defaults”

Quick break from the book (Update: It’s finished! Here – 1000 Castaways: Fundamentals of Economics) posts…

The new Wall Street Journal piece “Debt Denial Is a Threat to America” by Desmond Lachman reminded me of some recent IMF-type absurdity that sovereign currency-issuers can be forced to default in their own currency involuntarily. (Desmond writes elsewhere “The most likely scenario is that the government arrives at the Treasury auction one day, and finds that there are not enough willing buyers for it to roll over expiring debts” Oh really Desmond? )

Ask any of their authors to name currency issuers that have actually been forced into involuntary default in non-foreign denominated debt and of course they cannot.

They will point to this Bank of Canada article “Database of Sovereign Defaults, 2017” which claims 141 examples supporting their headline “ Database of Sovereign Defaults”.

But on closer inspection, only about 20 something of these are in what they call “Local currency debt”, and the “defaults” are mostly what they call “confiscatory currency reforms” defined as “ the exchange of old central bank currency for new on confiscatory terms”.

At any rate, their cases are listed below. It is astounding that anyone thinks the list below can support the mainstream/IMF austerity etc policies that abound, based on the idea that “default” is a worry for currency issuers such as the US, UK, Australia, Japan, or even less developed currency issuers.

It s important to highlight this list, as people such as Lachman trot out the bogeyman of “default” all the time, yet the list of countries (and time period) is laughable (My favorite absurdity: Sri Lanka, listed as a default because its “central bank severely damaged by a terrorist bomb”, I guess listing Puerto Rico rivals that in absurdity). And in these countries “confiscatory currency reforms” are being counted as “defaults”.

The Bank of Canada list of “local currency default” = waaay less that 141 (!) And hmmm, I wonder if these countries were suffering any other issues in those time periods, and perhaps not really applicable to the USA, UK, Switzerland, Norway, Poland, New Zealand, China etc.. Naw, just my imagination I guess

[Update, 2020: I may have taken for granted how much people might know about the events for the dates listed below in each country; if interested, just do a quick wikipedia search for the history of that country in that year, and it becomes obvious the commonalities of war, civil war, corruption, natural disasters, disease, foreign denominated debt, crazy dictators, and so on.]

• Angola 1990
• Cabo Verde 1999–2001
• Cambodia 1975
• Cuba 1961
• Ghana 1979 and 1982
• Iraq 1990 1993
• Korea (North) 1992 and 2009
• Laos 1976
• Mozambique 1980
• Myanmar 1964, 1985, 1987
• Nicaragua 1988
• Nigeria 1967 and 1984
• Rwanda 1995
• Sudan 1991
• USSR/Russia 1991, 1993
• Venezuela 2016
• Vietnam 1975, 1978, 1985

The above I think are all “confiscatory currency reforms”. The others:

• Peru “domestic bonds”
• Puerto Rico(?!) “tax supported obligations”
• Turkey 1999 “withholding tax targeting government securities”

and of course, last but not least, Sri Lanka:

• Sri Lanka 1996 “central bank severely damaged by a terrorist bomb”

That mainstream economists base what is essentially their entire belief system (regarding austerity) on the possibility that a sovereign currency issuer can be forced into default in its own currency is laughable just from knowing the theory (or here). When you see the data that they are relying on, it is even more absurd. Beyond belief really.

Would be funny if millions weren’t suffering around the world from their recommendations of austerity based on the above list.

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These are the complete entries (i.e., the notes are theirs as well) from their paper that are listed as “local currency defaults” :

4. Angola Angola’s 1990 local currency default was the result of a confiscatory currency reform.

21. Cabo Verde Local currency debt in default in 1999–2001 reflects interest arrears and the conversion of some instruments into longer-term low-interest foreign currency debt financed by external donors.

22. Cambodia The 1975 local currency default was the result of the Pol Pot regime’s abolition of money. As central bank records are not available, currency data for Laos, with comparable per capita US-dollar GDP in 1975, was used to calculate a proxy value for Cambodian defaulted currency.

35. Cuba Cuba’s 1961 local currency default was the result of a confiscatory currency reform. We have revised values for defaulted Paris Club debt in 1986–2014 to reflect interest arrears restructured in the 2015 agreement. We have also revised the value of bank loans in default between 1985 and 2017 to reflect additional information on their terms.

51. Ghana Note: Ghana’s local currency defaults in 1979 and 1982 were the result of confiscatory currency reforms.

64. Iraq Note: World DataBank data on debt owed to other official creditors are not available prior to 2002. The 1990 local currency default stemmed from the actions of Iraq, then the occupying power in Kuwait, in converting Kuwaiti currency to Iraqi currency on confiscatory terms. The 1993 local currency default was the result of a confiscatory currency reform.

70. Korea (North) Note: North Korea’s local currency defaults in 1992 and 2009 were the result of confiscatory currency reforms. In the absence of central bank data, we utilize Hwang’s assumption that currency in circulation amounted to 2 per cent of estimated GDP.

72. Laos Note: Laos’s 1976 local currency default was the result of a confiscatory currency reform.

88 Mozambique Note: The 1980 local currency default was the result of a confiscatory currency reform.

89. Myanmar INote: The 1964, 1985 and 1987 local currency defaults were the result of confiscatory currency reforms.

92. Nicaragua Nicaragua’s 1988 local currency default was the result of a confiscatory currency reform.

94. Nigeria Nigeria’s local currency defaults in 1967 and 1984 were the result of confiscatory currency reforms.

99. Peru Note: Local currency debt refers to domestic bonds that have been in default since the 1980s. Estimated amounts reflect an original face value of US$343 million (as cited by Duggar and Leos) that over time has been impaired by exchange rate depreciation. The government acknowledges this debt, but amounts owing are in dispute with creditors and subject to domestic and foreign litigation.

103. Puerto Rico Note: Bonds in default refer to “tax supported” obligations, meaning that they are a claim on government tax revenues.

105. Rwanda The 1995 local currency default was the result of a confiscatory currency reform.

120. Sri Lanka The 1996 local currency default reflects the suspension of treasury bill auctions and rollover of maturing debt between January and March after the central bank was severely damaged by a terrorist bomb.

121. Sudan Note: Sudan’s local currency default in 1991 was the result of a confiscatory currency reform.

132. Turkey Turkey’s 1999 local currency debt default reflected the imposition of a withholding tax targeting government securities issued prior to December of that year.

137. USSR/Russia Note: The 1991 and 1993 local currency defaults were the result of confiscatory currency reforms.

140. Venezuela Venezuela’s 2016 local currency default was the result of a confiscatory currency reform.

141. Vietnam Vietnam’s 1975 local currency default resulted from the conversion of South Vietnamese currency to North Vietnamese currency on confiscatory terms. The 1978 and 1985 local currency defaults were the result of confiscatory currency reforms. As central bank records are not available for 1978, currency data for Laos, with comparable per capita US-dollar GDP, was used to calculate a proxy value for converted Vietnamese currency. ”