Europe’s debt situation in the light of past sovereign defaults
Valentin KATASONOV | 24.07.2015 | WORLD | BUSINESS

Europe’s debt situation in the light of past sovereign defaults

At least two European countries today are on the verge of sovereign default. Those are Greece and Ukraine. It is difficult to believe that the deteriorating debt situation in those countries simply arose on its own. The debt crises in Greece and Ukraine are man-made. The West (specifically «the money masters») methodically and on a «scientific basis» have driven both countries into a trap of debt.

For example, in Greece this was done by the bank Goldman Sachs, which issued «off-balance-sheet» loans to that eurozone member, and the resulting debt was never factored into the country’s official statistics. No one has forgotten about that, but today it is all attributed to greed and chicanery on the part of the bank. There are substantive reasons to believe that this was a special operation carried out by the «money masters» (the shareholders of the US Federal Reserve), who were planting a «time bomb» under all of Europe. Incidentally, Goldman Sachs itself is one of those «money masters» (specifically - it is under the control of the Rothschild family) and is a shareholder of the Federal Reserve.

There have been many sovereign defaults in recent history (table 1).

Table 1.

The largest sovereign defaults of recent decades


Time of default

Total debt at the time of default, in billions of dollars


August 1982



January 1983



February 1987



August 1998

approximately 40


December 2001



December 2008


Here are some explanatory details about the defaults listed in this table.

Mexico. On Aug. 12, the Mexican ministry of finance announced a three-month moratorium on the payment of its foreign debt. In December 1982, the IMF approved a three-year assistance program for Mexico worth $3.8 billion. Then the country was granted two more three-year packages before 1993, for a total equal to 5.2% of Mexico’s GDP.

Yugoslavia. On Jan. 19, the federal government announced a default on the repayment of the principal of the debts owed by the central government, Yugoslavia’s constituent republics, and its state-owned enterprises (they continued to pay the interest). In the summer of 1983 Belgrade successfully pay off debts, plus interest, totaling $1.9 billion that were held by private foreign creditors (about 600 Western banks). In early September of that same year, an agreement was signed with creditors to restructure her unpaid balance and receive a new loan of $600 million.

Brazil. By late 1987, the Brazilian ministry of finance had already signed agreements with her banks to resume interest payments. The next year Brazil signed a comprehensive agreement with her creditor banks to reschedule her debt payments.

Russia. On Aug. 17, 1998, the Russian government announced a payment freeze on ruble-based securities (short-term government bonds known as GKOs), a significant percentage of which belonged to foreign investors. On Aug. 17, 1998, a 90-day moratorium was also declared on repayments of monetary loans obtained by commercial banks from non-residents. This meant a de facto default on the banking sector’s foreign debt. After negotiating with the holders of the GKOs, that debt was restructured: the old securities would be exchanged for cash (equal to 10% of the face value for non-residents) and for new government bonds with maturities of up to five years.

Argentina. The default announced by the government on Dec. 24 was preceded by widespread bank runs within the country. Argentina’s debt was restructured twice, in 2005 and 2010. Frozen bonds were exchanged for new ones with a face value up to 75% lower. A small number of investors (about 7%), represented by what are known as vulture funds, did not agree to the terms of the restructuring and decided turn to the courts to seek full repayment of the original amount. In 2012, a New York court ordered Buenos Aires to settle its old debts. But Argentina has refused to comply with the court’s demands. In July 2014, the rating agencies and the negotiations mediator appointed by the US court declared an official default.

Ecuador. In 2008, the government debt audit commission found numerous instances of violations and corruption that accompanied the floating of bonds on international financial markets. In late 2008, the government announced a moratorium on servicing global bonds maturing in 2012 and 2030 with a nominal value of $3.2 billion. In 2009, Ecuador, completely refusing to negotiate with investors, redeemed those bonds at a huge discount of only 35% of their nominal value.

All the above defaults originated with statements by the governments of the debtor countries that they were imposing a moratorium, i.e., suspending their debt payments. The exception was Argentina. In the summer of 2014, it was not the government of that country that declared a default, but the international rating agencies.

Based on the standards set in previous decades, last May’s passage by Ukraine’s Verkhovna Rada of a law that gives the country’s president the right to impose a moratorium on foreign debt payments might already qualify as a de facto default.

No further comments can be made about Greece. She missed a scheduled IMF debt payment, which would have previously not only qualified as default, but default «in spades». But all the established rules and practices are disappearing, and debt issues are now resolved «under the table,» based on political expediency.

In practice, two primary methods have been employed in recent years to pull a country back (to withdraw) from default: a) by providing new loans, or b) by restructuring debt through negotiations with creditors. But even here we note one unusual situation. In the case of Ecuador, that nation forced its securities to be redeemed at a lower rate. We call this option «unilateral debt restructuring». The Greek government has never discussed such an option, as far as I know. The Ecuadorian «precedent» is being hushed up because it was unacceptable to the «money masters». In addition, some investors did not agree to the unilateral restructuring. Specifically, in late 2014, GMO Trust, a Boston investment company, filed a lawsuit in New York, trying to recover the original value of the debt it purchased from Ecuador.

Digging a little deeper into the history of the 20th century, we soon find even more large-scale defaults. The default announced in 1971 by the United States of course springs to mind. Washington does not like to discuss that. On Aug. 15 of that year President Richard Nixon appeared on television and stated that the US would temporarily stop exchanging dollars for gold, as had been established by the Bretton Woods Conference in 1944.

But that was a very specific default. It is believed that Washington entered into a commitment at that conference to keep the dollar freely convertible into precious metal. But first of all, that was not a debt commitment. Second, that was a commitment that was never recorded in any special document. It was in essence a pledge made by Washington. Aug. 15, 1971 was just one example of how easily Uncle Sam goes back on its promises. No doubt if Uncle Sam declared a default on government debt today, it would do it in a graceful and civilized manner, just as it did in 1971.

After World War I there were also slew of sovereign defaults. Their number increased after October 1929, when the global economic crisis began. But the German default is the most interesting and sinister story from that time. Especially because after the war she was still living under the shadow of her prewar debts. And to those were now added astronomical demands for reparations payments. At the Paris Peace Conference in 1919 the victors of WWI insisted on a sum of reparations that was insupportable, equivalent to the value of 100,000 tons of precious metal. That was more than all the gold in every vault of every central bank and treasury in the world.

One member of the British delegation, the renowned economist John Maynard Keynes, was outraged by the greed of the Entente Powers and even quit the conference in protest. He estimated that the victors were demanding reparations equal to at least three times the entire economic potential of Germany. During the 1920s, heated conflicts continually arose between the victorious countries and the Weimar Republic (as Germany was then known). France even occupied the Ruhr Valley in order to ensure that Berlin met its reparations commitments.

But not even military pressure could help - in part because Germany simply could not meet her commitments (as her economy did not recover), and in part because she did not want to (she was looking for ways to evade the cash payments and supplies of goods required under reparations). Therefore it can be said that Germany was in a state of permanent default. There were periodic restructurings of the Weimar Republic’s reparations commitments, both in terms of the amount of the reparations as well as the payment (supply) schedules. What happened between the victorious countries and the Weimar Republic is very reminiscent of what is happening today between Athens and the «Big Three» creditors - the European Commission, the IMF and the ECB. Back then it was the German people who were being humiliated and economically steamrollered, and today the «Big Three» are humiliating and economically devastating Greece.

As we know, in the early 1930s, the attitude of the «allies» toward Germany suddenly underwent a dramatic shift. First, investments and loans flooded into the Weimar Republic. This was why the Bank for International Settlements (BIS) was established in 1930 in Basel. Formally, the BIS was intended to facilitate German reparations payments, but in fact the bank became the financial channel for «pumping up» the German economy. How can such a reversal in the West’s policy toward Germany be explained? It seems that Russia, then known as the USSR, had launched a powerful renaissance in the East.

After its first five-year plan, the Soviet Union had already achieved the world’s second-highest industrial output and had begun to build up its military might. At that time the decision was made to beef up Germany’s military and economic potential and to redeploy her armed forces in an eastward direction. After 1931 Berlin no longer had much difficulty getting agreements signed with the victors of WWI, which lightened Germany’s debt load. Even the implacable France, who in the 1920s almost began a new war with Germany in order to «force» Berlin to meet its reparations commitments, completely changed her tune in the early 1930s. Between June and July 1932, a conference was held in Lausanne that closed the books on the «allies’» reparations claims against Germany. Ninety percent of those claims were withdrawn, and the rest converted into debt securities.

When Adolf Hitler came to power in 1933 this turned the final page in the story of the dismantling of the German debt by the victorious nations. The period of bilateral settlement of debt issues had come to an end. And a period of unilateral decisions had begun. Those decisions were made by the leader of the Third Reich, Adolf Hitler. For example, on June 14, 1934 the Reichsbank (the Central Bank of Germany at that time) announced the suspension of payments on foreign debts, including interest. Instead, creditors received certificates, which they could convert to three-percent bonds with a maturity of 10 years. During 1934, German debt (excluding reparations) was reduced by 97%, which saved Germany more than one billion marks that year alone.(1) And this is the most surprising. The «allies» were in no way outraged by such unilateral decisions from Berlin. Moreover, the US, Great Britain, and other Western countries continued to provide economic support to the Third Reich.

The history of how Germany’s debt problems were resolved during the interwar period is very instructive. It once again reminds us that a nation’s debt problems can be used to achieve the geopolitical goals of the «money masters». There can be no doubt that the current debt problems of Greece and Ukraine will be resolved (and are already being resolved) with consideration for the «Russian factor», which those masters, both in the 20th century as well as now, see as the main threat to their plans for world domination.

(1) For more details see: Katasonov, Valentin. Genuezskaya Konferentsiya v Kontekste Mirovoi i Rossiiskoi Istorii. - Moscow: Kislorod, 2015 // Part 6. «Sudba Germanskikh Reparatsii Posle Genui».