Sovereign debt is not a risk-free asset

Article Highlights

  • 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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About the Author

 

Alex J.
Pollock
  • Alex J. Pollock is a resident fellow at the American Enterprise Institute (AEI), where he studies and writes about housing finance; government-sponsored enterprises, including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks; retirement finance; and banking and central banks. He also works on corporate governance and accounting standards issues.


    Pollock has had a 35-year career in banking and was president and CEO of the Federal Home Loan Bank of Chicago for more than 12 years immediately before joining AEI. A prolific writer, he has written numerous articles on financial systems and is the author of the book “Boom and Bust: Financial Cycles and Human Prosperity” (AEI Press, 2011). He has also created a one-page mortgage form to help borrowers understand their mortgage obligations.


    The lead director of CME Group, Pollock is also a director of the Great Lakes Higher Education Corporation and the chairman of the board of the Great Books Foundation. He is a past president of the International Union for Housing Finance.


    He has an M.P.A. in international relations from Princeton University, an M.A. in philosophy from the University of Chicago, and a B.A. from Williams College.


  • Phone: 202.862.7190
    Email: apollock@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: (202) 419-5212
    Email: emily.rapp@aei.org

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