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The following article appeared in Left Business Observer #99, February 2002. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.


How to default: a primer

by Norman Strong

Norman Strong is the pen name of someone who spends his life surrounded by financiers and central bankers.

Debt default ought to be considered one of the most important policy weapons in the arsenal of any developing country sufficiently creditworthy to have international bonds outstanding. It has much to recommend it over IMF austerity programmes: it's available immediately, and the burden is borne mostly by foreigners.

The Latin American defaults of 1982-86 have given default a bad name, but it's wholly undeserved. Countries that defaulted first came through with the least disruption to their economies, with no consequences for future access to international bond markets. Default has been part of the development strategy of every G8 country except Japan, including the U.S.: long after Gorbachev settled with token payments on Tsarist-era debts which had been repudiated in 1917, the government of Mississippi still hasn't paid a penny on its bonds of 1870.

This introduction to default is aimed at presidents, finance ministers, and their advisors in developing countries with more than $1 billion in international bonds outstanding. Sadly, this guide offers little to the poorest countries, who can't sell bonds, and rely largely on official lenders like governments and the World Bank. For them, we recommend the work of Drop the Debt.

Palmerston

An early theory of sovereign default is the Palmerston doctrine, introduced in a British diplomatic circular of 1848. Sir J