Government defaults on bonds are much more common than you would expect

A report by David Beers

at the Bank Of Canada 

identified 27 nations involved 

in local currency defaults 

between 1960 and 2016.

David Beers wrote: 

“A long-held view 

by some investors 

is that governments 

rarely default on local 

or domestic currency 

sovereign debt. 

After all, they say, 

governments can service 

these obligations 

by printing money, 

which in turn can reduce 

the real burden of debt 

through inflation 

and dramatically so 

in cases like Germany 

in the 1923 

and Yugoslavia 

in 1993-94. 

Of course, it’s true 

that high inflation 

can be a form of 

de facto default 

on local currency debt. 

Still, contractual defaults 

and restructurings occur 

and are more common 

than is often supposed.”

Most local citizens 

are the first ones to avoid 

the domestic currency exposure 

and buy US dollars, gold 

or (now) crypto-currencies, 

fearing the inevitable.

There are 152 fiat currencies 

that have failed 

due to excess inflation. 

Their average lifespan 

was 24.6 years 

and the median lifespan 

was 7 years. 

In fact, 82 of these currencies 

lasted less than a decade 

and 15 of them lasted 

less than 1 year.

Governments always see 

economic cycles as a problem 

of lack of demand 

that they need to “stimulate.” 

They see debt and asset bubbles 

as small “collateral damages” 

worth assuming 

in the quest for inflation. 

Inflation and high taxation, 

negatively impact 

competitiveness 

and ease to attract capital, 

invest and create jobs. 

This relegates a nation 

of enormous potential, 

such as Argentina, 

to the final positions of the 

World Economic Forum index, 

when it should be at the top.

Excessive inflation and high taxes 

hide excessive public spending 

that reduces private sector 

economic activity.

Argentina's public expenditure 

reached 47.9% of GDP in 2016,

doubling between 2002 and 2017.

Governments will 

destroy purchasing power 

at any cost to benefit from 

“inflating its way out of debt.”