Debt Dilution: When It Is a Major Problem

By BURCU EYIGUNGOR – Business Review, Federal Reserve Bank of Philadelphia

In light of the ongoing European debt crisis, the potential problems faced by countries in servicing their national or sovereign debt have attracted renewed attention. We had come to believe that sovereign debt crises were exclusively a phenomenon of developing countries, as all defaulters since World War II had been developing countries. Recent developments, however, show that default is an important concern for all countries, threatening the stability of world markets.

Episodes of sovereign default are typically very costly, not only for the lenders but also for the defaulting country itself. Defaults — in fact, the mere possibility of default — lead to substantial losses in output, high unemployment, and often political upheaval. Furthermore, not only are default episodes costly, they are also surprisingly frequent. For instance, between 1981 and 2004 there have been 114 episodes of sovereign default in the world.

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Debt Dilution

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source: http://www.philadelphiafed.org/research-and-data/publications/business-review/2013/q4/brQ413_debt_dilution.pdf