Sovereign Debt, Default and Restructuring

• Explain why and how governments partake in deficit financing. 

Governments can borrow from 3 key sources: banks (private or public), governments and IGOs, and Bond Markets (investors). They do this because AEs can borrow cheaply from bond markets, DCs cannot access bond markets, and emerging economics can access the bond markets but not always on favorable terms.

• Outline broadly the events which can trigger a sovereign debt crisis and explain why a perception of sovereign risk amongst investors can become a self-fulfilling prophecy. 

Most DC debt is acquired through aid packages (loan and IFT). If the aid packages are unproductive, the debt burden increases. An example is odious debt, where sovereign debt is accumulated by dictatorship. Most governments facing a debt crisis accept bailout packages from “concerned” governments and/or IGOs. IFTs are typically found within bailout packages

• Discuss the unilateral options open to debtor governments to resolve a sovereign debt crisis and evaluate the costs and benefits of such unilateralism. 

Options: 

1. Official Default: A government officially reneges on its debt obligations

2. Stealth Default: Defaulting via inflation. Only for borrowing that is denominated in the local currency, government has full control over its currency, and not an option in a monetary union

3. Debt Initiative: Repayment of debt on terms decided by and preferable by a debtor. 

Benefits: Reduces government spending: on debt servicing, allowing the government to reduce its spending per se, redirect its spending, and cut taxes. 

Costs: 

1. Future weakness in issue strength (but often found to be exaggerated/inverted

2. Retaliation by creditors - But only relevant if creditors are more powerful than debtor

• Discuss the unilateral options open to creditors to resolve a sovereign debt crisis and evaluate the costs and benefits of such unilateralism.

Debt cancellation (creditors write of more than 90 percent of country's sovereign debt owed to them)

Benefits: Creditors may have a stake in the debtor’s economic rehabilitation (usually for geopolitical objectives)

Costs: Financial losses for creditors, encourages more government borrowing/spending, encourages unilateral default by other heavily indebted governments

• Explain the three ‘phases’ of a bailout package: 

crisis stabilization: ensures immediate debt obligations are met. Retirement of impending debt obligations

Debt relief: Write offs, rescheduling, and recalibrating

Structural Adjustment: (Ostensibly) a set of economic policies intended to reduce the debt burden to sustainable levels over long term and prevent further debt crises. Policies claim to create a high growth/low debt burden economy. Dismantle of IIP, Privatization of the economy, and Austerity.

• Explain the conflicting interests between creditors and debtor over the extent of debt relief and the extensiveness of structural adjustment and outline the conditions which can allow the debtor government to influence the terms of the bailout package to their own advantage.

Debtors: Want max debt relief/min structural adjustment. Debtors can “successfully” default, militarily powerful and economically self-sufficient.

Creditors: want min debt relief/max structural adjustment. Creditors have low resilience to default, private sector credits

• Explain, compare and contrast the debt crises of sub-Saharan Africa in the early 1980s with the Greek crisis from 2010 onwards.

Sub Saharan: Debt through Aid packages, Emerged by global downturn (1970s), Response: Bail Out Package, Creditor/Debtor tricks not successful, Weak debtor bargaining power

Greece: Debt through bond markets, Emerged thru global downturn (2008), Response: Bail out package, Creditor/Debtor tricks successful (Strategic leverage: creditor was successful, debtor was a fail), Weak barganing power

• Outline the impact of EU-driven austerity on Greek women (see required reading). 

EU-driven austerity compounded pre-existing inequalities for Greek women across health, employment, and welfare. Women faced an unemployment rate of 29.3% (rising to 65% among young women), while public sector hiring freezes disproportionately affected them given their concentration in that sector. The resulting financial stress contributed to a 39.2% spike in heart attacks among women (compared to 29% overall), with acute myocardial infarctions rising 51%. Deteriorating healthcare access worsened outcomes further — pregnant women without insurance were excluded from obstetric care, stillbirth rates rose, and those unable to afford treatment delayed seeking help until conditions became critical. Women simultaneously bore increased domestic burdens, longer working hours with frozen pay, and reduced access to medication, creating, as one researcher noted, a compounding "formula for stress" with severe long-term health consequences.