Alan Beattie: Lessons for the Greek crisis from Philip II of Spain
[Alan Beattie is the world trade editor of the Financial Times.]
If you want to go back to the roots of Greece’s financial crisis, you could always start with Philip II of Spain. Born in 1527; acceded to the Spanish throne in 1556; defaulted on the national debt in 1557, 1560, 1575 and 1596; died in 1598. Now there’s a sovereign who knew how to renounce sovereign debt. Philip would leave an Argentine finance minister standing.
The path of default he laid down has seen heavy traffic across the centuries from monarchies and republics, democracies and dictatorships. Europe – and increasingly the world – is now watching the chaos in Greece and wondering if this is a Lehman Brothers of the public sector. So it is striking that after all this time the world still treats restructuring, or the rewriting of sovereign debt contracts, as an act of extraordinary calamity.
Despite the sounds of garment-rending catastrophe that generally accompany them, defaults are not at all unusual. Outstanding historical research by Ken Rogoff and Carmen Reinhart, which forms part of their drily titled book This Time is Different, shows defaults coming in waves. Some reflect the cost of maintaining armies: there was a flood of defaults during the Napoleonic wars. Others simply reflect a downturn when a sudden stop in capital flows and economic growth makes previously tractable debt burdens unsupportable.
The wave of defaults triggered by the Great Depression extended to the 1950s, when nearly half the countries in the world were in default. Even the US in effect repudiated obligations by legislating forcibly to sever a link between Treasury bonds and the gold price. Greece itself built up a rich history of welching on its debts. Crises starting in 1826 shut it out of capital markets for 53 years; its Depression-era external default lasted from 1932 until 1964.
In 2010, there are widespread sovereign debt problems. They are unusually concentrated in the advanced world. The proximate cause is governments taking on massive private sector debt as part of their financial sector bail-outs. But that came on top of nearly a decade of underlying fiscal deficits in many rich countries, funded by borrowing and often masked by a short-lived surge in tax revenue pumped up by a housing boom and an asset bubble.
So that is how we got here. And there is a big divide between official and private views of how to get out. Most economists and investors think Greece will have to restructure – the fiscal arithmetic is too unpleasant and Greek society too divided to deliver the cuts needed. But European finance ministers and the International Monetary Fund insist that is unthinkable.
Public musing about restructuring may indeed incur costs. Yet history suggests that hanging on can make matters worse...
Read entire article at Financial Times (UK)
If you want to go back to the roots of Greece’s financial crisis, you could always start with Philip II of Spain. Born in 1527; acceded to the Spanish throne in 1556; defaulted on the national debt in 1557, 1560, 1575 and 1596; died in 1598. Now there’s a sovereign who knew how to renounce sovereign debt. Philip would leave an Argentine finance minister standing.
The path of default he laid down has seen heavy traffic across the centuries from monarchies and republics, democracies and dictatorships. Europe – and increasingly the world – is now watching the chaos in Greece and wondering if this is a Lehman Brothers of the public sector. So it is striking that after all this time the world still treats restructuring, or the rewriting of sovereign debt contracts, as an act of extraordinary calamity.
Despite the sounds of garment-rending catastrophe that generally accompany them, defaults are not at all unusual. Outstanding historical research by Ken Rogoff and Carmen Reinhart, which forms part of their drily titled book This Time is Different, shows defaults coming in waves. Some reflect the cost of maintaining armies: there was a flood of defaults during the Napoleonic wars. Others simply reflect a downturn when a sudden stop in capital flows and economic growth makes previously tractable debt burdens unsupportable.
The wave of defaults triggered by the Great Depression extended to the 1950s, when nearly half the countries in the world were in default. Even the US in effect repudiated obligations by legislating forcibly to sever a link between Treasury bonds and the gold price. Greece itself built up a rich history of welching on its debts. Crises starting in 1826 shut it out of capital markets for 53 years; its Depression-era external default lasted from 1932 until 1964.
In 2010, there are widespread sovereign debt problems. They are unusually concentrated in the advanced world. The proximate cause is governments taking on massive private sector debt as part of their financial sector bail-outs. But that came on top of nearly a decade of underlying fiscal deficits in many rich countries, funded by borrowing and often masked by a short-lived surge in tax revenue pumped up by a housing boom and an asset bubble.
So that is how we got here. And there is a big divide between official and private views of how to get out. Most economists and investors think Greece will have to restructure – the fiscal arithmetic is too unpleasant and Greek society too divided to deliver the cuts needed. But European finance ministers and the International Monetary Fund insist that is unthinkable.
Public musing about restructuring may indeed incur costs. Yet history suggests that hanging on can make matters worse...