The first recorded instance of a government debt default occurred in Greece. In the fourth century BC, 10 members of the Attic Maritime Association defaulted on loans from the Delos temple. These city-states have had many followers. Six European countries defaulted on external debt between 1300 and 1800 – some of them several times – according to Credit Suisse. Since then, it is hard to keep count. Yet the predominant thinking in policy circles now is that sovereign default in an advanced economy, as an International Monetary Fund report puts it, is “unnecessary, undesirable and unlikely”.
Investors are not so sure. In spite of having the security of a €110bn bail-out package backed by the IMF and the European Union, not to mention access to the €750bn European stability facility, the Greek government’s long-term debt is priced to yield 9-10 percentage points more than comparable German obligations. Those spreads, close to levels during the eurozone sovereign debt crisis, suggest that a default is not only possible but quite likely.
The IMF paper argues that the government can keep servicing the debt without too much trouble, as long at it turns current large fiscal deficits into big surpluses. This is true, but not necessarily realistic. Greece has already pledged a