15 January 2009

Sovereign Debt

Rad Geek is overjoyed to see Ecuador default on its bonds.

He argues, entirely correctly, that there's no moral case for a government to pay debts - it has no moral right to contract debts on behalf of the people.  Lenders who lend to governments are in the same boat as the contractors I was talking about the other day.  They're doing business with a government, the name for which is "politics".  They are therefore exposed to political risk.

He also points out the absurdity of the "debt forgiveness" movement.  Governments don't have to pay any debts they don't feel like paying, as Ecuador demonstrates.  Therefore if they pay, they want to pay.

Why would they want to pay?  Because they want to continue to participate in the system.  Bluntly, they want to be able to borrow more.

Felix Salmon has a somewhat different take on the situation.  By his account, we are not seeing a principled attempt to detach from the global financial system, rather an almost-random blundering by a corrupt government that doesn't know what it's doing.

Meanwhile, Greg Ip asks in the Washington Post whether the US is likely to default on its debt.  Would that be a victory for the people?  I'm not convinced that the Ecuadorean default will be any better for the people of Ecuador.

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