SOVEREIGN DEFAULTS: Evidence from the Great Depression challenges conventional views of what gets countries into debt troubles

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25 Mar 2015

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Countries that defaulted on their public debt during the Great Depression of the 1930s had lower rather than higher debt-to-GDP ratios, according to research by Andrea Papadia to be presented at the Economic History Society’s 2015 annual conference. What’s more, countries that relied more on foreign borrowing were less likely to default than those relying more on internal sources of finance.

The new study of the largest debt crisis of the past century confirms some current notions about such crises, but also questions widely held beliefs on what can get countries into debt troubles. Analysing newly collected data, Papadia finds that:

  • Around 14% of defaulting countries’ public debt was made up of short-term liabilities, compared with around 5% for non-defaulting countries.
  • Both domestic and foreign lenders were more willing to lend to fiscally stronger countries, which were able to raise more tax revenues and also fend-off default. High debt was an indicator of ability to borrow rather than a sign of imprudent behaviour.
  • Governments of economies that relied more on foreign borrowing to finance both their public and private sectors were less likely to renege on their debts, as the exclusion from borrowing would have been more costly.
  • Countries that suffered smaller contractions in international trade were better equipped to avoid a default.

Papadia notes that the lessons learned from the Great Depression of the 1930s were a guiding light for policy-makers during the initial phase of the current crisis. But policy-makers have been less successful in dealing with its aftershocks, including the eurozone debt crisis.

The Great Depression offers invaluable lessons for this issue too. One reason is that the debt crisis of the 1930s, like the current one, originated from a worldwide economic slump. Another reason is that it not only affected developing countries, like most post-World War II crises, but also advanced ones.

Papadia sheds new light on these events by reconstructing and analysing the size and composition of public debt burdens faced by countries at both the national and sub-national level. His findings confirm some widely held beliefs about debt crises: large amounts of debts with short maturities and collapses in international trade are key drivers of default.

But the findings also question some deep-seated notions about debt crises. In particular, a high degree of foreign borrowing in both the public and private sectors, traditionally considered a sign of fragility, was accompanied by a lower probability of default.

This indicates that while the economic calculus might sometimes lead countries to renege on their obligations, the possibility of being cut off from financial markets following a default might be perceived as too costly for countries receiving substantial foreign capital.

Furthermore, the study questions the assumption that high debt-to-GDP ratios are necessarily conducive to debt troubles. Current experiences of countries such as Japan pose challenges for this notion, but the Great Depression years offer systematic evidence that countries with higher debt-to-GDP ratios were less likely to default.

This puzzling result is explained by the fact that these countries also had developed fiscal apparatuses able to raise enough taxes to service the debt and to withstand crises. While the countries that eventually defaulted saw their tax revenues crumble in the early 1930s, non-defaulters withstood the shock. European countries troubled by inefficiencies and tax evasion might yet benefit from the lessons of the past.


Andrea Papadia
London School of Economics and Political Science

The full paper ‘Sovereign Defaults during the Great Depression: New data, New Evidence’ can be found at:

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