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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