Government debt: Borrow, do not repay, start again

A state does not die, does not retire, and can raise taxes. That is why people lend to it. And that is why it sometimes abuses it.

It often starts with a war. A war quickly costs more than a country can raise in taxes.

There are only three ways to pay for it: raise taxes, borrow, or print money.

During the First World War, France launched big national loans. Posters called on every saver to lend.

After the war, inflation ate away the value of these bonds. Those who had lent were repaid in devalued money.

That is the fourth way, the most discreet, of paying a debt: letting prices rise.

And sometimes, a state does not pay at all. That is called a sovereign default.

Argentina has become the symbol: nine defaults, from the first in eighteen twenty-seven to the last in two thousand twenty.

Each time, the country ended up borrowing again. Lenders forget, provided the rate is high enough.

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Two thousand twelve: Greece. After years of crisis, its debt became impossible to repay.

Private creditors agreed to swap their bonds for new ones, worth far less. It was the largest restructuring in history.

They lost fifty-three point five per cent of face value. Out of ten thousand euros, four thousand six hundred and fifty were left.

And that is only face value. With lower rates and pushed-back maturities, the real loss was heavier still.

Finally, a curiosity: the debt that is never repaid. The perpetual bond.

In the eighteenth century, the United Kingdom bundled its debts into bonds called consols. They paid a fixed interest, forever.

Say one hundred pounds at three per cent: three pounds a year. After a century, three hundred pounds of interest, and the capital never returned.

For the state, it is a debt that melts on its own with inflation. The Napoleonic wars were partly funded this way.

The last of these bonds was repaid in two thousand fifteen, because rates had become so low that repaying cost less.

The twist: a state that does not pay is almost never punished forever. The market forgives, at a higher rate.

But its people pay. Failed banks, frozen savings, cut pensions, a collapsing currency.

When a state defaults, its own banks often hold a large share of its debt. Their fall hits the country's savers directly.

Remember three things: a state pays through taxes, through inflation, or does not pay. And its borrowing rate tells you what the market thinks.