October 27, 2008economic crisisEconomyForeign AffairsPakistanpoliticsPublic Policy

Hey, sovereign default is not such a bad thing

And your daily dose of unconventional wisdom

This is an archived blog post from The Acorn.

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.



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