Wednesday, June 18, 2014

Sovereign Credibility 

It was once thought that a country would always pay its debts.  It would do so because it did not want to get shut out of international credit markets.  We know now that isn't true, and some debtor countries resist what they call "extortion" by creditors who want to get repaid.  The perpetrator is claiming to be the victim.  A sovereign state that plays to constituents but snubs the world's financial markets will lose credibility.  This is a case in which political spin will work against it.  Argentina will find the cost of its debt has risen along with the risk of repayment..  It might not reach junk levels, but repayment of principal and interest will strain the treasury.  Is it worth it?  A politician who seeks short-term solutions might think so, but it turns the country into a pariah.  Like it or not, countries cannot exist on their own.  Even North Korea is dependent on the world for essentials such as food.  It is risky business to toy with sovereign credibility.


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