Quit Worrying, Sovereign Defaults Happen All the Time

If aliens were to have landed on the planet Earth and picked up a Wall Street Journal at any point over the past year, they'd be excused for concluding that sovereign defaults are rare and momentous events. Can you think of the last time you read a major newspaper and didn't come across an urgent story about the European debt crisis? I can't -- though I wish I could, just to prove myself wrong.

The reality is that debt crises occur everywhere and all the time. According to Carmen Reinhart and Kenneth Rogoff's magisterial study of the subject, This Time Is Different, "most countries in all regions have gone through a prolonged phase as serial defaulters on debt owed to foreigners" (emphasis added). Their book talks about the "universality of default" and says things like "serial default is the norm." And Reinhart and Rogoff would know, as they cataloged literally hundreds of sovereign defaults over the years.

The reason I bring this up is to add context to the current discussion about Europe's travails. While I'm not trying to minimize the significance of the ongoing crisis, I am trying to say that we've been here before -- hundreds of times. Indeed, as you can see in the table below, many countries around the world have spent much of their time as independent nations in one stage of default or another.

Country

Percentage of Years in Default or Rescheduling Since Independence or 1800

Total Number of Defaults and/or Reschedulings

Ecuador 58.2% 9
Greece 50.5% 5
Russia 39.1% 5
Hungary 37.1% 7
Argentina 32.5% 7
Brazil 25.4% 9
Spain 23.7% 13
China 13% 2
Japan 5.3% 1

Source: Carmen Reinhart and Kenneth Rogoff, This Time Is Different.

What about Greece's recently announced 130-billion-euro bailout, you ask? Don't let that fool you. The consensus is that it's only a temporary solution meant to buy time before a potential series of orderly defaults, starting in Greece and ending God only knows where. For the time being, in turn, I'd recommend that investors steer clear of publically traded European financial companies like Germany-based Deustche Bank (NYSE: DB  ) and Switzerland-based Credit Suisse (NYSE: CS  ) and UBS (NYSE: UBS  ) , all of which will be significantly affected if and when defaults begin.

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Fool contributor John Maxfield does not have a financial position in any of the companies mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2012, at 11:08 AM, DJDynamicNC wrote:

    Spain has defaulted an average of once every 16 years. That was unexpected.

    Great information in this, thanks for the article.

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