20 country debt crises and what happened next
The International Monetary Fund—an international organization of 189 nations charged to promote global monetary cooperation and financial stability among its members—in October 2019 was accused by debt campaigners of recklessly allocating loans to nations that have yet to establish a debt reconstructing program. The IMF has historically been a backer of debt reconstruction loans that helped nations like Mexico, Russia, and Greece recover after their debt crises. However, recent loans, such as the IMF’s 2018 $50 billion in loans to Argentina, are reflecting an increasing tolerance for high-risk lending.
Nations regularly borrow money for various reasons. It can be to help resolve budget deficits, to pay for wars or other military activities, as part of a trade agreement, or to encourage domestic growth and infrastructure improvements. When a nation defaults on these loans, it can cause deep ripples in the global economy.
An example of this is the global financial crisis of 2007-2008, when subprime mortgage swaps in the United States led to the collapse of the investment bank Lehman Brothers. This caused an international debt crisis that affected most nations, but hit Portugal, Ireland, Italy, Greece, and Spain the hardest. These nations had the most difficulty complying with the Maastricht Treaty, which required European Union members to limit their deficit spending and debt levels. This has significantly affected the European Central Bank and destabilized the euro.
While not every nation has defaulted on its sovereign debt, many have, and the effects have been sobering both domestically and internationally. To help highlight this, Stacker has compiled 20 of the largest national debt crises. While this list is not inclusive of all sovereign debt defaults, it is a sampling of some of the most important defaults historically and currently. As illustrated, many of these defaults either directly or indirectly put in place the circumstances that changed the world.
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In one of the first major sovereign credit defaults, Spanish King Phillip II defaulted on the nation’s loans and declared bankruptcy. This was due to the exorbitant costs of the wars the Spaniards were waging at the time, the declining value of gold, and the high interest rates the nation was assessed pre-default—with some being as high as 50%. The kingdom would continue to repeatedly default. However, the Spanish military activities during this period helped to forge the Spanish Empire and Spain’s domination of the Caribbean, Southeast Asia, and what is now Latin America.
[Pictured: Philip II wearing the order of the garter by Jooris van der Straeten, c. 1554]
United States: 1779
Another sovereign debt crisis triggered by war, the 1779 American Credit Crisis was triggered by a devaluation of the Continental Dollar due to Congress’s inability under the Articles of Confederation to levy taxes. Eventually, the Continental Dollar was redeemed at a rate of 1,000 to 1. This crisis led to the eventual replacement of the Articles of Confederation with the current Constitution. Indirectly, because France was a creditor to the United States during the Revolutionary War, the added financial pressures may have led the French Monarchy to overextend the American line of credit, eventually leading to the French Revolution.
[Pictured: The face of a 1779 $55 bill of Continental currency]
United Kingdom: 1772
While not technically a sovereign credit crisis, the United Kingdom’s 1772 financial crisis still significantly changed the world. In the 1760s, the British Empire was in full swing, producing a great deal of wealth for the island nation. This led to rapid credit expansion by the British banking system. When one of the partners of the banking house Neal, James, Fordyce, and Down fled for France in 1772 to escape debt payments, this created a banking panic, with depositors and creditors immediately demanding cash withdrawals. This money crunch would arguably become one of the drivers of America’s independence.
[Pictured: "The Pool of London" by John Wilson Carmichael]
Again, while not a sovereign credit crisis, the Thai crisis of 1997 caused deep ripples globally. In 1997, following the devaluation of the Chinese renminbi and the Japanese yen, a drop in semiconductor prices threatened Asian export revenues. This meant the collapse of the Thai baht. The collapse caused the devaluation of other Eastern Asian currencies, triggering a global economic collapse.
[Pictured: Nov. 21, 1997—Thai Foreign Minister Surin Pitsuwan shakes hands with U.S. secretary of state after their bilateral talks during the first day of the Asia Pacific Economic Cooperation (APEC) ministerial meetings where Thailand seeked assistance to deal with their economic crisis.]
Following the fallout of the global recession of 2008, several Eurozone member states found it impossible to refinance or repay their national debts. These included Greece, Portugal, Ireland, Cyprus, and Spain. As the Eurozone is a currency union without a fiscal union—that is, one currency with different taxation and public spending rules—it was difficult for the European Central Bank and the various member nations to properly respond. To this day, the crisis continues, with many affected nations subject to adverse labor market conditions. A number of Eastern and Southern European nations are now facing negative population growth as a result.
[Pictured: 2011, President Obama sat down with Czech Prime Minister Peter Necas in the wake of an announcement that European leaders reached an agreement to cut Greek debt and solve the Eurozone crisis.]
In 1998, Ukraine was married to Russia financially. So, when the Russian markets crashed that year, it wiped out any financial gains the Ukrainian economy had made. The crisis would help to establish Ukraine as one of Europe’s poorest nations per capita. It would also create the underpinning of the anti-Russian sentiment that eventually became Euromaidan and the current conflict between Russia and Ukraine.
[Pictured: Euromaidan in Kiev]
The African island nation of Seychelles may have been pushed into default by the global recession, but it found its way to the edge through decades of questionable economic decisions. To improve living standards in the 1970s, the nation engaged in a socialism-inspired scheme that succeeded in its goals, but undermined productivity. With foreign investors being offered large tax concessions, the government was forced to borrow to meet spending expectations. The International Monetary Fund bailed the nation out in 2009, while forcing changes in its monetary and taxation structure. Much of the economy today, however, is still controlled by state-owned entities.
[Pictured: The Central Bank building in Victoria, Seychelles]
1999 was a bad year for Turkey. The Asian Financial Crisis of 1997 and the Russian Financial Crisis of 1998 had both significantly weakened foreign investor confidence in Turkey. This caused a drop-off of foreign investments in the nation, leading to a shrinking of the national gross domestic product by 3.6%. This was happening around the time of the Izmit earthquake, which left 17,000 dead and more than 250,000 displaced. This confluence led to a local bond default in 1999 of over $5 billion, which may have been a harbinger for the banking collapse that would wrack the nation from 2000 to 2001.
[Pictured: An aerial view of damage after the powerful earthquake in a residential area near Izmit, Turkey, on Aug. 23, 1999]
Banking regulations are largely a controversial subject. On one hand, regulation opponents feel that banks should have the freedom to respond to a free market in real-time. On the other, regulation proponents argue that unchecked banking actions could endanger an economy and leave depositors and borrowers exposed to greater risk. This is what happened in Uruguay. Uruguay is largely dependent on neighbor Argentina. So, when Argentina went through an economic slowdown in 2001, Uruguay saw one-third of the nation’s deposits withdrawn. This effectively left five of the nation’s banks insolvent and led to a round of new regulations in the nation.
[Pictured: World Trade Center Montevideo, Uruguay]
One of the nations that hit by the 1997 Asian Financial Crisis was Mongolia. While outside of Southeast Asia, Mongolia borders Russia and was already weakened by the nation’s economic slowdown. As much of Mongolia’s growth was fueled by bank credit and its economy is tied to China’s, the global downturn effectively erased the nation’s previous economic growth. This was compounded by dropping commodity prices for copper and gold. The nation, however, learned from this and the nation’s economy has rebounded.
[Pictured: Stock Exchange & Golomt Bank, Ulaanbaatar, Mongolia]2018 All rights reserved.