Options Governments Have to Get Out of Sovereign Debt
The ripples of the Greek debt crisis are still being felt. The crisis itself was part of five separate incidents of sovereign debt that have been working their way through the Eurozone since as early as 1999. The Greek government had a serious problem on its hands, but it appears some of that has been taken care of by the European Central Bank.
In fact, Greece has seemingly staved off default for some time. The reality is that governments have multiple methods they can use to avoid default under normal circumstances.
Inflation and Currency Values
When a country experiences inflation, the value of the currency it uses decreases. This drives the cost of products higher, because domestic purchases require more cash to complete. The flipside is that governments can pay off their debts with this devalued currency. However, this does not come without a penalty.
A country has to print money in order to pay debts with this devalued currency. If this is done too frequently, investors get wise and the country ends up with a declining credit rating. That rating means higher borrowing costs overall. This should naturally limit a country’s spending during times of sovereign default.
Unfortunately, Greece, and Spain to a lesser extent, could not get their spending under control. This came at the rather unfortunate time in history that the United States was experiencing the Great Recession. Both countries also had the unfortunate luck of being part of the Eurozone, which is a double-edged sword in this situation. While Greece gained significantly during the late 90s, those gains were trumped by government spending that only got worse as time went on.
Phineas Upham is an investor from NYC and SF. You may contact Phin on his Phineas Upham website or Twitter page.