David Beers and Jamshid Mavalwalla
Defaults on sovereign debt – the term commonly used to denote debt issued by national governments and other fiscally autonomous territories – are a recurring feature of public finance. They are more widespread than is often appreciated, since 1960 involving 145 governments, over half the current sovereign universe. Examples include the many governments ensnared in the Latin American and Eastern European debt crises of the 1980s. More recently, there have been big bond defaults by Russia (1998), Argentina (2001), Greece (2012), and Puerto Rico (2015). On a smaller scale, scores of sovereign defaults can occur each year on one or more types of debt. Some, such as Sudan’s, have dragged on for decades and remain unresolved (Chart 1).
It is hardly surprising, then, that sovereign defaults have spawned a rich literature looking at the factors that drive them, their domestic economic and political effects, and their global impact. Yet it can be disconcerting when researchers find that they must mine default data from multiple sources. To tackle the problem, the Bank of Canada (BoC) launched a public database of sovereign defaults in 2014, now updated annually in partnership with the Bank of England (BoE). In a recent staff working paper, we outline the components of the database and the sources used to compile it, provide a link to the latest vintage of the data (1960-2017), and include a commentary on key findings.
In this post, we’ll look at the most important trends that emerge from the data, discuss why this unique database took so long to develop, and conclude with some thoughts on how it may evolve going forward.
First, here are our main takeaways from the 2018 update:
- The global footprint of sovereign defaults remains low. We estimate the total value of debt in default last year at US$216.4 billion, 0.3% of world public debt. Defaults had the biggest impact globally in the 1980s, peaking at 6.2% in 1990, and they have fallen substantially since then, even in 2012-2013 when Euro Area sovereigns were involved.
- We estimate that the number of sovereigns in default fell to 78 in 2017 from 89 in 2016, the lowest since 1986.
- Like in other recent years, the distribution of obligors in default in 2017 is highly skewed. Just three sovereigns – Puerto Rico, Sudan and Iraq – accounted for two-thirds of the U.S. dollar value of debt in default globally last year, and the top 10 sovereigns in default for 89% (Chart 2).
- In U.S. dollar terms, official creditors accounted for 55% of sovereign debt in default and private creditors for 45%. Within the 2017 total, the value of defaulted foreign-currency (obligations denominated in another sovereign’s currency or, in monetary unions, in the common currency) bonds showed the largest increase – US$3.3 billion, to an estimated US$77.8 billion – due to Puerto Rico’s escalating default, and new defaults by Belize, the Republic of Congo, El Salvador, Mozambique and Venezuela, offset in part by the resolution of Argentina’s default in 2016. By contrast, loans by the Paris Club (an informal group of 22 bilateral official lenders, including the UK government) and local-currency debt (obligations denominated in the sovereign’s currency) in default both declined, with values in other creditor categories showing smaller changes in both directions.
- The data offer a more nuanced view of previous research documenting sovereign default “clusters” – spikes in the number of defaults followed by sharp declines. Defaults involving official creditors often occur before those involving private creditors and can take longer to resolve. An example is the 36 countries granted debt relief through the Heavily Indebted Poor Countries (HIPC) Initiative, launched in 1996, where some bilateral official loans, owed by over half of HIPC sovereigns, have not yet been written down. Such official creditor “holdouts” are at least as common as the better-known ones that have delayed the bond restructurings by Argentina and some other sovereigns.
- Defaults involving the Paris Club are declining in importance, but those involving other bilateral official creditors appear to be growing. The Paris Club’s share of all bilateral official debt in default has dropped from 40% to 25% over the past decade. By contrast, the share involving defaults on loans from other bilateral official creditors – notably China, India and the Gulf states – has grown.
- Since 1960, 145 governments – well over half the current sovereign universe – have defaulted on one or more types of local and foreign currency debt. Emerging market and developing countries predominate, but advanced economy countries periodically are also involved.
- For some sovereigns, defaults recur or persist for long periods. Examples include the Democratic Republic of Congo (50 years), Zimbabwe (47), Yemen (45), Sudan (42), Cuba (41), and Argentina (38). Wars, revolutions, and poor governance appear to be the main drivers.
- Defaults on local currency debt are relatively common, involving 31 sovereigns since 1960. The data challenge the view of some market participants that these defaults rarely occur since governments can service their local currency debt by printing money. While we find that such defaults often are idiosyncratic, a factor shared by the sovereigns involved is weak domestic governance.
- Looking ahead, we expect sovereign defaults to pick up again over the next decade, given growing public debt burdens in many countries. At the same time, with rising cross-border investment in domestic debt markets, defaults on local currency debt could become as common as defaults on foreign currency bonds.
Chart 2: The Largest Sovereign Defaults (% of US$ total), 2017
Regarding the database’s origins, a question we often get is why did it take so long to create. A humdrum reason is that mining multi-year data, even when it is in the public domain and from the same source, is time-consuming. This was top-of-mind when Kurt Schuler, at New York’s Centre for Financial Stability, recently put the long lag before a historical database of the U.S. Federal Reserve’s weekly balance sheet was compiled down to economists’ reluctance “to collect data even when (it) does not involve getting up from the computer screen.”
By contrast, the data for the BoC-BoE database comes from a wide range of sources – multilateral lending institutions, bilateral official creditors, credit rating agencies, private creditors, the media, research papers, and even some not previously in the public domain. Consequently, it is perhaps easier to understand why it has taken so long to compile. Of course, this effort has benefited from the support of our two institutions. Without it, more years might have passed until others took the initiative.
Besides analytical inertia, there were other obstacles. One is the lack of a global standard for determining when sovereign defaults occur. The failure to pay interest and principal on time and in full is a clear-cut example of default, but researchers do not always consider cases where debt is restructured and/or written down. Another impediment is the stigma associated with sovereign defaults, which makes some governments and their creditors reluctant to acknowledge them.
We deal with these knotty issues with two objectives in mind. To maximise coverage, we gather data using a broad definition of default – one that includes interruptions of scheduled debt service and changes in payment terms that result in creditor losses. By documenting the many sovereigns that have defaulted, we help reduce the stigma of default that, in turn, may make future ones easier to identify. As Reinhart and Rogoff have previously highlighted, the reality is that sovereign defaults can include advanced economy, emerging market and low-income countries.
The product of this work, the BoC-BoE database, is unique. It is the only dataset in the public domain estimating the U.S. dollar values for all identified sovereign debt in default. It is compiled by country and by debt type, aggregated globally, and updated annually. It thus documents these defaults’ varied life cycles. By contrast, other datasets typically focus on point-in-time defaults/restructurings of specific debt types like foreign currency bonds and bank loans.
The database includes them but also shines a light on defaults on debt owed by official creditors. Such defaults get less attention from researchers, despite the fact that they often are larger than defaults involving private creditors and often overlap with them (Chart 1). As well, the database includes defaults on local currency sovereign debt, which are little explored in the literature, helping perpetuate the myth that they are rare. In sum, the database gives researchers a more comprehensive picture than previously available to inform analysis of the economic and financial impacts of sovereign defaults.
The BoC-BoE sovereign default database is a work in progress. Future updates will certainly be populated with new defaults. There may be historical defaults not yet identified that will be, and estimates of amounts of defaulted debt that need revising in light of new information. In addition, there is a strong case for including some types of government fiscal arrears. The database currently includes defaults on the securitised debt owed to private creditors. However, some late payments for goods and services, when lawfully contracted, are also government obligations effectively in default. If these can be quantified, we will include them in future updates of the database.
David Beers works in the Bank’s International Directorate. This post was written whilst Jamshid Mavalwalla was working at the Bank of Canada.
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