The geography of debtors is vast: from Greece to Ecuador
“Only cowards repay debts” — this aphorism, attributed to various celebrities, has already become a classic of Russian financial and exchange folklore. And by the way, in the past, officials from different countries have stated something similar in meaning at a very high level and quite seriously.
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So, even the Minister of Finance of France under King Louis XV, Joseph-Marie Terre, considered it completely normal if any state once a century refuses to pay its debts, not even because it is not able to repay them, but because the interests of the state require it. The well-known German politician, banker and economist Karl Ditzel urged states to live in debt, as this contributes to the well-being of the people, without thinking too much about when and how the state will repay these debts. This position led to high-profile defaults of states (that is, to their refusal to pay their debts for various reasons) that occurred at the end of the 20th and in the 21st century, which should be recalled on the day of the 25th anniversary of a similar event that occurred in Russia.
One of the most notorious defaults of the second half of the 20th century occurred in Mexico on August 20, 1982 (August again!). The government of the country announced on that day that it was impossible to make payments on external debts totaling $80 billion, and a little later added that the domestic public debt in the amount equivalent to about $20 billion would also not be repaid due to the collapse in oil prices. Recall that by the beginning of the 80s of the 20th century, the state budget of Mexico was almost a quarter dependent on oil revenues. The restructuring of Mexico's debts took almost eight years, and the US even invented the so-called «Brady bonds» — after the US senator, who proposed a special mechanism for issuing bonds in dollars to exchange outstanding debts of developing countries for dollar bonds, which Mexico used for the purposes of restructuring remaining debt in 1990.
Another high-profile default at the end of the 20th century was the Russian one, which happened in the dashing nineties. On August 17, 1998, the Government of the Russian Federation announced that it was unable to make payments on domestic and foreign debts totaling $191.6 billion, including $50.6 billion of domestic debt on state treasury bills (GKOs). In the 1990s, Russia lived in debt, borrowing from the IMF and international credit organizations, as well as almost endlessly issuing GKOs and paying off previous ones with funds from the sale of new bond issues. Russia's ability to live off its own resources was then limited due to low tax collection, falling from year to year production in almost all sectors of the economy and low oil prices, which by mid-August 1998 had generally collapsed to $ 12 per barrel — to the price the level of the beginning of the 20th century. The default caused a sharp devaluation of the ruble and a political crisis. However, these events eventually led to the appointment of Yevgeny Primakov as head of the RF Government and a complete change in the composition of the Cabinet, and ultimately to a radical change in the economic model in Russia. The collapse of the ruble led to a rise in the price of imported goods, which created an impetus for the growth of Russian industry and agriculture, and the sale of foreign exchange earnings allowed the country to increase its gold and foreign exchange reserves. In the spring of 1999, Russia temporarily joined the reduction of oil production together with the OPEC countries (it is interesting that Mexico and Norway joined the OPEC initiative at the same time), 4 extra million barrels of oil per day were “removed” from the market, which made it possible to quickly restore the growth in prices for «black gold», and oil and gas countries — their lost budget revenues. During the year, Russia managed to restructure previously unpaid debts through an exchange, including for Eurobonds in dollars. But the most important lesson was that the country stopped not only living in debt, but also borrowing from the IMF, and began to issue bonds and Eurobonds only in case of urgent need.
The first scandalous default of the 21st century and the first largest in Latin America was the default of Argentina on government bonds in 2001 in the amount equivalent to $100 billion. As a result, goods from Argentina became uncompetitive on the world market, and the country's state budget revenues plummeted, which became an excuse for the country's authorities to refuse to service their debt. The Argentine government refused to peg the peso to the dollar, but the debt restructuring then took place for almost a decade, and even then, during this time, the country's authorities managed to restructure only 92% of the previously outstanding debt. Nevertheless, Argentina learned very peculiar lessons from the default that cost the country dearly in 2021, simply refusing to service its debts due to unfavorable external circumstances in 2014 and 2020 (in 2014 due to the global economic crisis, and in 2020 due to the coronavirus pandemic). Argentina is far from the poorest country in Latin America and even in the world. According to the IMF, it ranks 71st in the world in terms of the standard of living of the population, ahead of even such BRICS countries as China and Brazil in this indicator. It is a major exporter of agricultural products and foodstuffs, one of the largest oil-producing countries. So Argentina basically has the capacity and resources to better manage its debt.
The negative example of Argentina in 2008, amid the global economic crisis, was followed by Ecuador, which refused to pay its debts of $ 30 billion because the country's government and President Rafael Correa considered unfair the «Brady bonds», for which the previous government exchanged government bonds in 1999 in the national currency, precisely to avoid default. Later, the Ecuadorian authorities offered creditors a scheme to buy back outstanding bonds at the expense of budgetary funds, but only at the market price, and they collapsed to such an extent that for every dollar invested in these bonds, each creditor received no more than 75 cents. In 2020, the new authorities of Ecuador, headed by the country's president named Lenin Moreno, refused to pay their debts due to the coronavirus pandemic and the collapse in oil prices. So the negative example of the attitude towards creditors is very contagious, at least in Latin America.
And in 2010-2012, a major default occurred in the European Union. We are talking about the default of Greece, one of the most indebted countries in Europe and around the world. Back in 2010, Athens announced that it was impossible to service the $240 billion debt. Since joining the euro zone, Greece has actually lived and continues to live in debt, and as a result, its authorities demanded financial assistance from the EU and the IMF in order to continue servicing debts. And this despite the fact that Greece makes very good money on tourism and agricultural exports, and the European Commission creates the most favorable conditions within the EU for the export of local olives, olive oil and other types of agricultural products, while limiting the export of competing products for some other EU partners and Eurozone, such as Portugal. That is, Greece, in principle, had and still has the opportunity to stop borrowing in huge amounts and start living within its means, but this did not happen. Greece solved its debt problems with financial injections from the EU, and in fact — at the expense of less indebted European countries and their taxpayers, primarily Germany. As a result, the authorities of the EU and the IMF made concessions to Greece, which threatened to leave the European Union if it refused to help. Today, few people remember that the well-known term «Brexit», which meant the UK's exit from the EU, came from the term «Grexit» that appeared much earlier, which meant the alleged exit of Greece from the European Union, which in the end did not happen, because Athens was flooded with money, it is clear that credit, thus increasing the national debt of the country even more. Today, its public debt is 206% of GDP, and according to this very impressive indicator, Greece is among the five most indebted countries in the world.