A Brief History of Default: The role of restructuring in the debt ecosystem.

• Author: Truman, Edwin M.

Barry Eichengreen, Asmaa El-Ganainy, Rui Esteves, and Kris James Mitchener present a valuable, detailed account of the evolution of public debt instruments and institutions that many either don't understand or take for granted. They distinguish between the debt of central and sub-national governments, debt sold in the domestic and foreign markets, and debt denominated in domestic and foreign currency. The boundaries of this changing landscape are fuzzy. The authors emphasize the evolution of government borrowing to finance a growing list of national objectives, starting with wars. Globalization of the sovereign allowed governments to expand their access to longer-term finance in the late nineteenth and first decades of the twentieth centuries. The focus shifted to bank loans in the 1970s and 1980s before reverting to the bond model in the early 1990s. In Defense of Public Debt focuses primarily on issuers rather than investors, and--as befits the title--on borrowing rather than default. Default, however, is part of the public debt ecosystem. In the domestic market, the government borrower makes the rules, and can change them in extremis. In foreign markets, sovereigns enjoy substantial immunity from debt enforcement. Investors in sovereign debt issued abroad have limited legal recourse when the borrower defaults. Their principal tool is to make life difficult for the borrower by trying to stop or seize payments. The offshore sovereign debt market has witnessed a century-long dance between issuers and borrowers with shifting appetites and legal leverage. That dance is in the background of the borrowing drama described in the book.

The wave of sovereign defaults in the Great Depression led to the development and refinement of various collection mechanisms. Gunboat diplomacy gave way to bondholder protective associations and coordinated contract reforms. Sovereign borrowers were shut out of the post-war bond markets until they settled with their creditors, which took decades in some cases.

In the late 1960s, many developing countries that had ridden the postwar commodity boom began to tap international financial markets again. International banks developed the syndicated loan market for longer-term lending. This market took off in the 1970s in the context of the international financial imbalances associated with the rapid rise in energy prices. It is a popular myth that deposits of oil exporters in international banks sustained the development...