“Watch Out for Sovereign Debt Risk” de Carmen M. Reinhart e Kenneth Rogoff
Already, a good share of Argentina’s debt is in default. What else do you call it when a government that owes over $30 billion in inflation-indexed debt manipulates its consumer-price statistics? Through a variety of crude measures (such as firing its top statisticians), the government is publishing an understated inflation rate that is used for calculating indexation payments.
The official inflation rate in Argentina for the past 12 months is under 10%. But the true inflation rate appears to be at least 30%, according to virtually every neutral source.
Fudging indexation clauses to effectively default on debt is an old game. During the second half of the 1980s, Brazil abrogated inflation-indexation clauses embedded in its debt contracts. In the Great Depression, the U.S. government revalued gold to $35 per ounce from $20, effectively rewriting the contracts of foreign holders of U.S. debt.
If external debt holders think that abuse of domestic debt holders is no cause for alarm, they should think again. Governments do not usually cheat holders of only one type of debt. In April, we published a National Bureau of Economic Research paper based on centuries of debt data from many countries. We found that most countries default on external debt only a bit less freely than on domestic debt. That is, contrary to popular belief, domestic debt holders are not necessarily a cushion for “senior claimants” holding externally issued debt.
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