Sovereign borrowers fall behind on record sums of debt

Sovereign borrowers are falling behind on record sums of debt, according to new research that provides a clearer picture of global solvency.

For the first time, economists at the Bank of Canada have compiled a comprehensive database of missed government debt payments that include sovereign bonds, bank loans and credit provided by official sector lenders such as the IMF and World Bank.

The study paints a bleak picture of global sovereign solvency, suggesting that arrears, default and debt restructuring are an even more frequent feature of public finance than already thought.

Although government debt default appeared to be on the wane in the early 2000s following the earlier debt crisis in Latin America and later Asia, the inclusion of money owed to official sector lenders reveals that countries were still failing to meet debt obligations.

The advent of the eurozone debt crisis also highlights that although debt crises are typically associated with low-income and emerging-market economies, advanced economy sovereigns are not immune.

In 2013, global arrears and restructuring spiked to a new high of $442bn as Greece, Ireland and Portugal restructured large sums of debt agreed by their EU partners.

By including late payments as well as debt that has been restructured, the research includes events not characterised as default by previous research.

When Greece missed the deadline for a €1.5bn payment owed to the International Monetary Fund earlier this year, neither the fund nor global credit rating agencies considered the event a formal default.Rather, Athens was deemed to be in arrears.

Harvard University economist Carmen Reinhart said the research helps to provide a more detailed picture of global solvency and is crucial information for both investors and policymakers.

“The addition of official sector debt is very important,” she said. “Once that is included you see the frequency of payment arrears rise.”

Co-authors Jean-Sébastien Nadeau and David Beers, former head of sovereign ratings at S&P and the man behind the infamous downgrade of the US, said the data suggests the frequency of such events may be increasing, and could be more closely correlated with rising public debt burdens than at any time since the 1930s.

When external conditions take a turn for the worse there is a higher incidence of default, said Professor Reinhart, who along with Kenneth Rogoff has repeatedly drawn attention to the magnitude of the debt problem facing the world today.

She said: “Economies that were the star performers of the decade to 2013 are now facing declining commodity prices, slower growth prospects and a possible US rate rise and they are being adversely affected in a way that they haven’t for a decade.”