Hey, sovereign default is not such a bad thing

And your daily dose of unconventional wisdom

Pakistan’s negotiations with the IMF for a bailout package might have been held up due to bitterness of the pill even as the spectre of sovereign default looms. So when Pakistan’s policymakers are trying to stave off the default, Mosharraf Zaidi stands in front of the oncoming traffic with a stop sign in his hand. “Sovereign default” he writes, “is simply a country not making its loan repayments on time. It has happened to plenty of countries. They are all still around.”

In short, governments choose not to default because it is the politically expedient thing to do. The actual economic costs of defaulting, Borenzstein and Panizza conclude, are simply not that high. Moreover, another paper earlier this year (by yet another IMF economist, Ali Alichi), suggests that the only real reason that countries repay the sovereign debt that they owe is to continue to be able to borrow money.

In short, Pakistan is trying to avoid defaulting so that the PPP government can stay in power, and so that while it stays in power, it can continue to borrow money. The real question here is: where is all the money going and why does Pakistan need to keep borrowing it? [Mosharraf Zaidi/The News]

For today’s dose of good writing read his piece on why Pakistan must default.

4 thoughts on “Hey, sovereign default is not such a bad thing”

  1. Such a wise article. Every word is a gem. I think they should try it – let LoP default. Let’s test Zaidi’s case – IMF conditions, as usual are silly and onerous on a weak economy anyway. Sure Zimbabwe is still around, then why not LoP 🙂

  2. This comment was moved here -Ed

    This is unrelated, but I wanted to put down this thought before I forget it.

    Pakistan is going through a tremendously bad period economically, and needs $4 billion to prop it up for a single month, but because of divisive politics and the crisis, it’s usual allies aren’t willing to do so. (It’s holding a ‘friends of Pakistan’ thing in Abu Dhabi soon)

    Could this be an opportunity for India to start actually acting like a sub-continental heavyweight, offering money in return for stuff, as well as proactively trying to improve the socio-political and economic status of the ‘neighbourhood’?

  3. In response to Rohan’s comment above.

    Consider this. You were a starving Indian citizen. You, for no fault of your own, find yourself in the bottom of the heap with a few hundred million others. The government of India — that agency that is partly responsible for the dire straits that you find yourself in — has a choice. It can use a few billion dollars to help you survive, or it can give it to Pakistan.

    Pakistan? Yes, the same country that spends billions of dollars — much of it acquired by begging the US — in arming itself so that it can destroy India. Yes, the very same nation which imposes heavy costs on India in term of blood, sweat and tears because India is the land of the filthy infidels and god has dictated that the Land of the Pure (“Pak” is pure and India is filth) should destroy the kufffars.

    Now ask yourself if you would be in favor of the Indian government spending resources on helping a country that is sworn to destroy India or if you would rather have those resources help you keep your body and soul together.

    I find myself searching for appropriate words of utter disbelief and contempt when I see Indians wondering if India should be helping Pakistan out in trouble.

    If it were up to me, I would deal the death blow and be done with the scourge that is Pakistan.

  4. In response to Rohan’s comments above.
    I was afraid that some guy would come out with such a suggestion. Its moronic, absolutely moronic.
    In the words of an immortal bard,

    I gazed — and gazed — but little thought
    What wealth the show to me had brought:

    For oft, when on my couch I lie
    In vacant or in pensive mood,
    They flash upon that inward eye
    Which is the bliss of solitude;
    And then my heart with pleasure fills,
    And dances with the daffodils.

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