The International Monetary Fund—an international organization of 189 nations charged to promote global monetary cooperation and financial stability among its members—in October 2019 was accused by debt campaigners of recklessly allocating loans to nations that have yet to establish a debt reconstructing program. The IMF has historically been a backer of debt reconstruction loans that helped nations like Mexico, Russia, and Greece recover after their debt crises. However, recent loans, such as the IMF’s 2018 $50 billion in loans to Argentina, are reflecting an increasing tolerance for high-risk lending.
Nations regularly borrow money for various reasons. It can be to help resolve budget deficits, to pay for wars or other military activities, as part of a trade agreement, or to encourage domestic growth and infrastructure improvements. When a nation defaults on these loans, it can cause deep ripples in the global economy.
An example of this is the global financial crisis of 2007-2008, when subprime mortgage swaps in the United States led to the collapse of the investment bank Lehman Brothers. This caused an international debt crisis that affected most nations, but hit Portugal, Ireland, Italy, Greece, and Spain the hardest. These nations had the most difficulty complying with the Maastricht Treaty, which required European Union members to limit their deficit spending and debt levels. This has significantly affected the European Central Bank and destabilized the euro.
While not every nation has defaulted on its sovereign debt, many have, and the effects have been sobering both domestically and internationally. To help highlight this, Stacker has compiled 20 of the largest national debt crises. While this list is not inclusive of all sovereign debt defaults, it is a sampling of some of the most important defaults historically and currently. As illustrated, many of these defaults either directly or indirectly put in place the circumstances that changed the world.
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In one of the first major sovereign credit defaults, Spanish King Phillip II defaulted on the nation’s loans and declared bankruptcy. This was due to the exorbitant costs of the wars the Spaniards were waging at the time, the declining value of gold, and the high interest rates the nation was assessed pre-default—with some being as high as 50%. The kingdom would continue to repeatedly default. However, the Spanish military activities during this period helped to forge the Spanish Empire and Spain’s domination of the Caribbean, Southeast Asia, and what is now Latin America.
[Pictured: Philip II wearing the order of the garter by Jooris van der Straeten, c. 1554]
Another sovereign debt crisis triggered by war, the 1779 American Credit Crisis was triggered by a devaluation of the Continental Dollar due to Congress’s inability under the Articles of Confederation to levy taxes. Eventually, the Continental Dollar was redeemed at a rate of 1,000 to 1. This crisis led to the eventual replacement of the Articles of Confederation with the current Constitution. Indirectly, because France was a creditor to the United States during the Revolutionary War, the added financial pressures may have led the French Monarchy to overextend the American line of credit, eventually leading to the French Revolution.
[Pictured: The face of a 1779 $55 bill of Continental currency]
While not technically a sovereign credit crisis, the United Kingdom’s 1772 financial crisis still significantly changed the world. In the 1760s, the British Empire was in full swing, producing a great deal of wealth for the island nation. This led to rapid credit expansion by the British banking system. When one of the partners of the banking house Neal, James, Fordyce, and Down fled for France in 1772 to escape debt payments, this created a banking panic, with depositors and creditors immediately demanding cash withdrawals. This money crunch would arguably become one of the drivers of America’s independence.
[Pictured: "The Pool of London" by John Wilson Carmichael]
Again, while not a sovereign credit crisis, the Thai crisis of 1997 caused deep ripples globally. In 1997, following the devaluation of the Chinese renminbi and the Japanese yen, a drop in semiconductor prices threatened Asian export revenues. This meant the collapse of the Thai baht. The collapse caused the devaluation of other Eastern Asian currencies, triggering a global economic collapse.
[Pictured: Nov. 21, 1997—Thai Foreign Minister Surin Pitsuwan shakes hands with U.S. secretary of state after their bilateral talks during the first day of the Asia Pacific Economic Cooperation (APEC) ministerial meetings where Thailand seeked assistance to deal with their economic crisis.]
Following the fallout of the global recession of 2008, several Eurozone member states found it impossible to refinance or repay their national debts. These included Greece, Portugal, Ireland, Cyprus, and Spain. As the Eurozone is a currency union without a fiscal union—that is, one currency with different taxation and public spending rules—it was difficult for the European Central Bank and the various member nations to properly respond. To this day, the crisis continues, with many affected nations subject to adverse labor market conditions. A number of Eastern and Southern European nations are now facing negative population growth as a result.
[Pictured: 2011, President Obama sat down with Czech Prime Minister Peter Necas in the wake of an announcement that European leaders reached an agreement to cut Greek debt and solve the Eurozone crisis.]
In 1998, Ukraine was married to Russia financially. So, when the Russian markets crashed that year, it wiped out any financial gains the Ukrainian economy had made. The crisis would help to establish Ukraine as one of Europe’s poorest nations per capita. It would also create the underpinning of the anti-Russian sentiment that eventually became Euromaidan and the current conflict between Russia and Ukraine.
[Pictured: Euromaidan in Kiev]
The African island nation of Seychelles may have been pushed into default by the global recession, but it found its way to the edge through decades of questionable economic decisions. To improve living standards in the 1970s, the nation engaged in a socialism-inspired scheme that succeeded in its goals, but undermined productivity. With foreign investors being offered large tax concessions, the government was forced to borrow to meet spending expectations. The International Monetary Fund bailed the nation out in 2009, while forcing changes in its monetary and taxation structure. Much of the economy today, however, is still controlled by state-owned entities.
[Pictured: The Central Bank building in Victoria, Seychelles]
1999 was a bad year for Turkey. The Asian Financial Crisis of 1997 and the Russian Financial Crisis of 1998 had both significantly weakened foreign investor confidence in Turkey. This caused a drop-off of foreign investments in the nation, leading to a shrinking of the national gross domestic product by 3.6%. This was happening around the time of the Izmit earthquake, which left 17,000 dead and more than 250,000 displaced. This confluence led to a local bond default in 1999 of over $5 billion, which may have been a harbinger for the banking collapse that would wrack the nation from 2000 to 2001.
[Pictured: An aerial view of damage after the powerful earthquake in a residential area near Izmit, Turkey, on Aug. 23, 1999]
Banking regulations are largely a controversial subject. On one hand, regulation opponents feel that banks should have the freedom to respond to a free market in real-time. On the other, regulation proponents argue that unchecked banking actions could endanger an economy and leave depositors and borrowers exposed to greater risk. This is what happened in Uruguay. Uruguay is largely dependent on neighbor Argentina. So, when Argentina went through an economic slowdown in 2001, Uruguay saw one-third of the nation’s deposits withdrawn. This effectively left five of the nation’s banks insolvent and led to a round of new regulations in the nation.
[Pictured: World Trade Center Montevideo, Uruguay]
One of the nations that hit by the 1997 Asian Financial Crisis was Mongolia. While outside of Southeast Asia, Mongolia borders Russia and was already weakened by the nation’s economic slowdown. As much of Mongolia’s growth was fueled by bank credit and its economy is tied to China’s, the global downturn effectively erased the nation’s previous economic growth. This was compounded by dropping commodity prices for copper and gold. The nation, however, learned from this and the nation’s economy has rebounded.
[Pictured: Stock Exchange & Golomt Bank, Ulaanbaatar, Mongolia]
Jamaica is not usually known for making big waves on the global financial scene. A member of the British Commonwealth, the Caribbean nation is largely known for its beaches and culture. Despite this, the third-largest economy in the Caribbean is grossly indebted, with the debt roughly amounting to 100% of the nation’s GDP in 2019 despite extreme government austerity. In 2010, the situation was much worse, with the debt to GDP ratio being around 140%. This meant that 65 cents of every dollar the government took in went to interest payments, leaving the nation in default and forced to engage in a debt exchange.
[Pictured: Jamaica paper bank money notes]
Ecuador’s 2008 default on its Global 2012 bond was a head-scratcher. The nation had $5.65 billion in cash reserves, but refused to pay the $30.6 million payment. The default was held up at the time as part of a debt repayment plan, arguing that part of the foreign debt was illegitimate. Ecuador managed to buy back a significant portion of the debt at a discount, making the scheme attractive in the short term. In the long term, however, it forced the country to pay more in cash payments on its bonds and incur new international debt.
[Pictured: World Trade Center Guayaquil, Ecuador]
Argentina’s Great Depression started in 1998. The nation’s history of strongmen governments created a weak economic foundation for Argentina, particularly the National Reorganization Process—the official name for the military dictatorship from 1976 to 1983. With large budget deficits, the national debt skyrocketed, highlighted by the Falklands War. With key trading partners Brazil and Mexico facing their own economic collapses, the Argentinian economy suffered until the Argentine peso devalued, leading to default of $132 billion of the national debt. The devalued currency made Argentine exports cheap, though, helping to increase exports sales and lead to a recovery of the economy.
[Pictured: Argentinian depositors protest the freezing of their accounts]
The 1840s canal default is not the United States’ largest sovereign credit crisis, but it may be the most interesting. In 1837, 19 of the 26 states defaulted, driven by a canal-building boom that was fueled by the success of the recently constructed Erie Canal. As the debt was interstate, military force and trade sanctions could not realistically be used to regain lost capital. By 1845, the debt was largely paid and the myth that trade sanctions could be used to force debt repayment had been disproved.
[Pictured: Caricature blames Andrew Jackson for hard times and the depressed state of the American economy]
Mexico’s 1994 default is one of the first examples of a currency crisis triggered by capital quickly being drawn from a nation. Following the signing of the North American Free Trade Agreement, Mexico entered a period of investor confidence, which was quickly undermined by the Chiapas Conflict and the assassination of presidential candidate Luis Donaldo Colosio. A peso pegged to the U.S. dollar, along with intervention from the Mexican central bank, led to a scenario where the peso was overvalued and therefore open to speculation. Foreign investors drew the peso out of Mexico, which forced the nation to purchase its own securities to maintain the money supply. The peso devalued, which led to runaway poverty and austerity in the nation. The U.S., Canada, and the IMF collectively bailed out Mexico.
[Pictured: People line up at the money exchange cashier at the Mexico City airport]
The 1998 Russian default, known colloquially as the Russian Flu, was largely self-inflicted. The Russian Central Bank devalued the ruble, triggered by high costs from the First Chechen War, the Asian Financial Crisis, and declines in oil and metal export prices. The bank’s move to devalue its currency and stop all payments on foreign debt was meant to prevent a collapse of the Russian banking system, but instead triggered runaway inflation and an international financial crisis. The Russian economy would recover, leading to major changes in the nation’s investment strategies. This situation was also part of the series of events that would culminate in the election of Vladimir Putin as president of Russia in 2000.
[Pictured: A Russian Mil Mi-8 helicopter brought down by Chechen fighters near the capital Grozny in 1994]
In 2008, all three of Iceland’s major privately owned commercial banks defaulted, following a run on deposits in the U.K. and the Netherlands. While the collapse was small in absolute size, this default was the largest ever seen in relation to a nation’s GDP. This default caused extreme political instability in the largely peaceful Arctic nation and a shutdown on international monetary trade in Iceland. The nation also underwent an economic depression that lasted until 2011 and a stock market collapse that saw 90% of the market’s value evaporate.
[Pictured: Some of the 6,000 protesters in front of the Alþingishús seat of the Icelandic parliament on Nov. 15, 2008]
The second-largest provider of high-grade crude oil in the world (following Libya), Venezuela was able to translate its oil supply into a source of extreme wealth. However, when oil prices drop, it immediately affected Venezuela’s revenue. In 2004, currency controls following Hugo Chavez’s Bolivarian Revolution and the dismantling of the state-owned oil company Petroleos de Venezuela, S.A.’s employee base led to a decline in oil production. This led to runaway inflation, reaching over 100% in 2015, which eventually fueled the 2017 default.
[Pictured: Soldiers carrying the flag of the Bolivarian Revolution led by Venezuelan President Hugo Chávez]
By 2017, Venezuela had a nearly 90% poverty rate. Sanctions by the United States and the international community made the economic situation in the nation worse. This was also exacerbated by the exiting of foreign investors and multinationals in the nation, such as Ford and General Motors, while American Airlines and United Airlines suspended ticket sales. International outrage against humanitarian violations from the administration of President Nicolas Maduro and attempts to skirt oil sanctions have left Venezuela with little to stop the economic collapse.
[Pictured: March 2014: A long queue to buy basic food at a supermarket in Venezuela]
Greece’s financial woes have been brewing for a long time. Increases in public sector employee wages, as well as borrowing to fund the 2004 Athens Summer Olympics, placed a high toll on the tourism-driven economy. The 2008 global recession forced Greece into austerity, with the nation’s position in the Eurozone making it difficult to reposition the national monetary policy. This led to a 2012 debt restructuring, a complete upending of the Greek political system, high unemployment numbers, and a declining population with most Greeks of childbearing age relocating outside the nation to find jobs.
[Pictured: Slogans on a wall in central Athens in 2018]
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