The events in Dubai in November 2009 brought alive the risks of Sovereign Defaults. Subsequent events in 2010, mainly surrounding PIIGS have further highlighted the risks that holders of Sovereign Debt face following the severe economic
As we enter the third year of crisis – if we take the forced demise of Bear Sterns as the first peak of crisis in 2008 – it would be interesting to look at historical evidence of sovereign defaults during the previous comparable global economic shock – the Great Depression of 1929.
The following chart shows the Sovereign Default Rates for the period 1929 to 1938.
The key takeaways from the above data are:
We need to see if the picture emerging from 2008 crisis is any different as compared to the 1929 events. Although the world economy is much more interlinked and leveraged this time around; the response of the central banks has also been significantly different this time. How the surfeit of global liquidity affects the solvency of stressed sovereigns is a matter of interesting debate.