Sovereign debt is not a risk-free asset

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  • In all cases, sovereign debt is not a risk-free asset.

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  • As Anatole Kaletsky wrote a generation ago: "For at least 500 years, governments and nations have defaulted."

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  • The notion that government debt is "risk-free" is a myth promoted by governments.

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Sir, Mario Blejer says: “In most cases, sovereign debt is not a risk-free asset.” This is an understatement. The correct statement is: “In all cases, sovereign debt is not a risk-free asset.” As Anatole Kaletsky wrote a generation ago: “For at least 500 years, governments and nations have regularly defaulted.”

The only question is what form the default may take: explicit default; or implicit default by inflation and currency depreciation, or by financial repression. Default, whether explicit or implicit, is always a risk with every government.

The notion that government debt is “risk-free” is a myth promoted by governments so they can get more money to spend, assisted by the financial regulatory arms of the governments. It has to be added that many economists are also complicit in this effort.

Alex J. Pollock, Resident Fellow, American Enterprise Institute, Washington, DC, US

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Alex J.
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