Sovereign Debt Defaults Dip in 1999 but Not for Long

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A gradual increase in sovereign debt defaults is expected over the next decade.

After a dreadful period in the early 1990s, sovereign debt defaults continued to decline in 1999, registering a 2% drop from 1998, according to a new survey from Standard & Poor's. The year, which saw widespread economic distress and international markets rattled by a devaluation in Brazil, was marked by only one new default-albeit a very notable one in still-troubled Ecuador-as well as a drop in the total and average amounts of debt in default. Celebrations may be premature, however, as 1999's figures may represent little more than the lull before a storm of debt default. Analyzing the longer-term prospects for sovereigns over the coming decade on the basis of recent figures, S&P expects there to be more problems.

Overall, 1999 was a reasonable year for sovereigns. The number of sovereign issuers in default dropped to 28 in 1999 from 32 in 1998, and the default rate dipped from 15.9% to 13.9% in the same period, according to the S&P survey, which covered both rated and unrated sovereigns. In 1999 five countries resumed normal debt service: Venezuela, Moldova, the Cook Islands, C6te d'lvoire, and Vietnam. The figures are especially encouraging when compared with 1990, the year in which Brazil defaulted on a whopping $62 billion in local currency debt. During that year the issuer default rate hit a high of 31%, following a steep climb from the 1970s, when the rate was a mere 2%. In the same year the total value of debt in default reached $335 billion, another record high. By 1997 that figure had dropped to about $75 billion, and although it grew to $102 billion in 1998 and 1999, it remained 69% lower than the 1990 figure. Between 1990 and 1999 average debt dropped from $5.8 billion to $3.3 billion. This relatively more modest decline of 53% can be attributed largely to Russia's default in 1999. At approximately S65 billion, it was the largest default on local and foreign currency debt by a single issuer since the early 1990s.

Part of the reason for the debt figures' improvement since 1990 is that Brazil defaulted on major commitments during that year. In addition, agreements between bank creditors and some of the largest sovereign borrowers not only served to patch up several large individual defaults, but also set precedents for other debt restructurings. The situation has been further helped by the improvement in the economic environment and a gradual change in the mentality of states. Says John Chambets of S&P in New York: "By and large you have had a benign environment, and I think defaults have also declined because of the strength of the Washington consensus." The impact of defaulting on sovereign debt is also becoming apparent, and countries are realizing they will suffer if they default. Chambers adds: "People now have a clear understanding of the consequences of a default."

While last year saw a tide of positive indicators, much remains troubling for sovereigns. Some countries that defaulted in 1998 were unable to dig themselves out of their hole, defaulting again in 1999. Most noteworthy was Russia, which restructured $36 billion of Russian ruble debt that it defaulted on in 1998. In 1999 the country defaulted on foreign currency debt of $28 billion that remained from the Soviet Union era, as well as on $1.3 billion of domestic Ministry of Finance Series III bonds. Russia's situation is sounding alarm bells about a type of debt that has not plagued sovereigns greatly. …