Severe Country Defaults in History

Argentina experienced the nightmare of going into default in July, which can happen to any country. The South American country, nevertheless, got off relatively easily compared to other similar situations. There are plenty of even worse precedents throughout history. On Wednesday, July 20th, Argentina went into default after negotiators failed to reach a deal on the country’s outstanding debt. It has started pointing fingers at the US and making threats to take the case to The Hague.

The government went into default on its sovereign debt when vulture fund investors sought full payment of bonds they own from the country. A ministerial team from Argentina traveled to New York in the days leading up to the declaration in July to broker a deal, and at the time, this was seen as a promising indicator that the two sides were talking. Argentina, sponsored by NML Capital, informed bondholders that it could not pay the $1.3 billion payment and blamed investors for taking advantage of the country’s financial crisis. It is yet unknown what kind of total harm Argentina will suffer as a result of this new default. At least the nation has experience with these sorts of crises; it defaulted in 2001 and 2002.

When compared to other global economic meltdowns, the most recent $1.3bn default is a little blip on the radar. Nations have a lengthy history of defaulting on debt in the global economy. According to some sources, Greece was the first to fail in 377 BC, whereas Spain has defaulted the most times of any country (six in the 1700s and seven in the 1800s, but thankfully never since). The catastrophic failure of Icelandic banks, which triggered a global recession, is often cited as an example of a major sovereign default in history. Starting with the US more than 150 years ago, here are some of history’s most notable and disastrous defaults.

America in the 1840s

It was not the largest currency collapse ever, but it is an interesting case study of what occurs when a government fails inside its currency. Not long after the US recovery from the “Panic of 1837,” 19 of the country’s 26 states went bankrupt. The habit of creating canals, which today look antiquated, contributed to the default. After a flurry of construction projects and a mad dash to acquire money to form new banks, massive debts totaling $80 million were incurred during the canal-building boom.

Creditors had no recourse to military action and were hesitant to implement trade penalties to recover the missing funds. Illinois, Pennsylvania, and the territory of Florida (which would not become a state until 1845) were among the 19 states that defaulted. Despite the lack of formal punishments, the loan was mostly repaid by the end of the 1840s. That trade restrictions have no impact on debt repayment is a common misconception that this helps to debunk.

Mexico in 1994

The Peso Crisis began when the government suddenly devalued the peso by 15% against the dollar, surprising everyone. After his inauguration, then-president Ernesto Zedillo declared that the peso’s value would not be decreased. It was a week later when the value of the peso was reduced. Foreign investors fled the country as a result of the devaluation, sending the Mexican stock market plummeting. The central bank was facing down the barrel of sovereign default when it had to repay tesobonos, a peso-dominated bond, by purchasing dollars with a much-devalued currency. It had a noticeable impact on neighboring economies as well. Its influence in the region now known as the “Tequila Effect” encompasses the whole Southern Hemisphere and Brazil.

The crisis caused a five percent drop in Mexico’s GDP, and the country was saved by an $80 billion credit package. The International Monetary Fund (IMF), Canada, many Latin American nations, and former US President Bill Clinton’s $50 billion loan all contributed to the bailout. A far worse economic disaster in Mexico and the rest of Latin America has been averted thanks to this.

Russia in 1998

As a result of the Russian government and the Central Bank of Russia (CBR) devaluing the currency and defaulting on large debt reserves, the global economy was on the verge of a flu pandemic. The CBR reported Russia’s first increase since the collapse of the Soviet Union, after 6 years of economic reform and stabilization. Although Russia’s foreign reserves were reduced by $5bn as a result of the CBR’s efforts to protect the ruble on capital markets, the country was eventually compelled to default on its obligations. In Russia, the stock market was closed for 35 minutes as shares dropped at an unprecedented pace. The meltdown, also known as the Russian Flu because of its extensive worldwide impacts, impacted markets around the globe, including those in Asia, the US, Europe, and the Baltic States.

The World Bank reported that on the eve of the financial crisis, $5 billion in loans from the World Bank and the International Monetary Fund had been misappropriated. It’s not simple to find silver linings amid Russia’s economic collapse. The crisis actually taught Europe an important lesson, however: how to control the spread of disease.

Iceland in 2008

A small country with a populace of about 320,000, Iceland caused a global financial meltdown. After the failure of three of its main banks, Glitnir, Kaupthing, and Landsbanki, in rapid succession due to the inability to pay off short-term obligations, the Nordic nation foreclosed on more than $85bn in debt. Resignation of the government followed, along with the theft of over 50,000 people’s life savings and the disruption of worldwide financial markets. Many factors, including neoliberal ideology, careless banking practices, and a lack of oversight, have been blamed for Iceland’s economic collapse.

Regardless of the specific causes, the conditions were set for private banks to expand at a rate that led to an unsustainable accumulation of debt. In contrast to the US, which used government money to bail out its banks, Iceland decided to reduce waste and let its financial institutions fail. Allowing the banks to absorb the loss has been advocated by economists like Joseph Stiglitz. The 3 % annual GDP growth that Iceland saw in 2013 demonstrated the validity of this theory.

Greece in 2012

Though the country officially embraced the euro in 2001, Greece’s economy had been in a downward spiral for years before. The cost of hosting the 2004 Olympic Games in Athens was estimated to be €9 billion by Bloomberg Businessweek, while public sector pay increased by 50 percent between 1997 and 2007.

By 2012, the government has already entered the largest sovereign debt restructuring in history, surpassing Argentina’s $94 billion financial crisis of 2001. Greece went into default following two years of economic suffering brought on by the 2008 global crisis and high debt-to-GDP ratios. Considering that its economy accounts for barely 2.5% of the EU’s total GDP, the crisis presented a minimal danger to Europe’s financial system. However, it had global repercussions as a result of its effect on short-term growth throughout the continent and the maintenance of the euro’s weakness relative to the US dollar.

Greece and the holders of its government bonds reached an agreement in March of 2012. Bondholders gave up and accepted new bonds with a longer term and half the value in exchange for their earlier bonds. Greece was able to reduce its €350 billion in debt by a significant amount as a result of the arrangement, but the country is still in a precarious financial position. The first bailout financing required that the government lower its deficit by 2016, and the EU finance ministers have allowed it until then.

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