"Countries cannot go bankrupt," proclaimed Walter Wriston, one of Citigroup's most cerebral but most misguided chief executives, in the 1970s. In his view, no matter how heavily indebted a country might be, "the infrastructure doesn't go away, the productivity of the people doesn't go away, the natural resources don't go away".
But the historical record is clear: scores of governments have failed to honour their financial commitments. From 1945 to the early 1990s the overwhelming majority of sovereign defaulters were in poor or relatively poor countries outside North America and Europe. The architects of the new single European currency therefore felt justified in regarding government debts in the newly-formed Eurozone as of impeccable quality.
Such was their confidence in the financial probity of member governments that banks were told by officialdom to treat sovereign bonds as a safe asset. Under the Basle rules of international banking, banks were not required to hold capital against possible default risk. The underlying assumption, in the Wriston spirit, was that, even if Latin American and African governments could go bankrupt, European ones could not.
In one respect the Wriston doctrine is correct, although the explanation is to be sought not in infrastructure, productivity or natural resources. The reason is cruder: the brute force of printed money. Citizens cannot refuse to accept payment in legal tender, just as they cannot refuse to pay taxes. Governments cannot go bust in debts denominated in their national currencies, because they can borrow limitlessly from the central bank which issues their tender.
The power to print money is a basic attribute of the sovereignty of modern nation states. Sure enough, it is open to abuse because too much money-printing causes inflation. Nevertheless, any government which hands the power to print its national currency to another authority must recognise an inevitable consequence. Its debt becomes far more risky. In particular, banks and other purchasers may in future buy it with less enthusiasm than before the dilution of monetary sovereignty.
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