While head of S&P Global sovereign ratings, I published a number of reports on defaults by both rated and unrated sovereigns between 1994 and 2006. Initially, I hoped to do updates on a regular basis (and at least annually), but my other responsibilities often got in the way. Besides, the project was not easy to delegate. While my colleagues came to appreciate the work I was doing, including its franchise value, very few were willing to share this work with me, or take it over. When I moved to Bank of Canada, I had no such difficulty and have been belessed with two excellent collaborators — first Jean-Sébastien Nadeau and now Jamshid Mavalwalla. I’ll come back to this issue a little later.
In between the S&P updates, I sometimes heard from readers asking where they might get the data ahead of the next published report. My answer, that the data had to be mined from multiple sources, as often as not caused great surprise and occasionally even consternation. Surely, many readers supposed, an organisation like the International Monetary Fund must collect this data. This seems a reasonable supposition, then as now, and certainly at a country level the IMF is aware of its members that have obligations in default. (Staff awareness of defaults by non-members may be another matter.)
Still, the Fund has never published data of the kind that S&P did. Nor has it sought to launch a database on the scale of the one housed in the Bank of Canada’s sovereign default database. It is not difficult to see why. The simple truth is that the IMF has a conflict of interest. It lends to sovereigns and, together with a number of multilateral development banks, has carved out a position as a preferred creditor relative to other official and private creditors. At the same time, no member state would welcome being labeled a defaulter by the IMF. Nor would the Fund want to be drawn into a debate with its members on what actually constitutes a sovereign default.
Unsurprisingly, our examination of hundreds of programme documents shows that the Fund often does shy away from using the highly charged term when discussing individual sovereigns. It may refer to a “payment default” when such an event involves a foreign currency bond, but with other obligations, notably loans by official creditors, it usually refers to payment defaults as “arrears” even though they, too, are contractual obligations. It’s a similar story with defaults on local currency debt. For example, in a 2007 report on Nicaragua, Fund authors refer to the sovereign’s “inability to service scheduled debt repayments that came due in January 2005––they were ultimately serviced in June and in November 2005…”
Standard & Poor’s, on the other hand, faces no such conflict./1 Its credit ratings are intended to reflect the credit rating agency’s (CRA) view of the likelihood of default, and that definition of default is applied in the same way to public and private obligors. As readers of Technical Paper 101 published annually between 2014 and 2017, and this year’s staff working paper published jointly by the Bank of Canada and the Bank of England, my current employer, will know, the way we define sovereign default draws on the definition that S&P (along with most other CRAs) employs. We simply apply the same definition to debt owed to official creditors, which CRAs generally do not rate.
1/ Of course I’m referring here, narrowly, to the CRAs’ lack of a conflict of interest in identifying debt defaults. Clearly, CRAs face other conflicts of interest in their businesses but these are outside the scope of our research on sovereign defaults.
David T. Beers 