Sovereign Debt in the Second Great Contraction: Is This Time Different? (The 2011 Martin Feldstein Lecture‪)‬

As the aftershocks of the recent financial crisis continue to radiate, it is a troubling period for the global economy. While the current popular moniker for the recent crisis is "The Great Recession," perhaps a more appropriate description is "The Second Great Contraction", as Carmen M. Reinhart and I have argued. This term is parallel to Friedman and Schwartz's description of the Great Depression as "The Great Contraction," referring to the global contraction of debt and credit, in addition of course to output and employment. Unfortunately, a long sub-par recovery is typical of deep financial crises. (1) My remarks will focus on one aspect of the ongoing great contraction, sovereign defaults on external debt. Long historical experience shows that major global banking and financial crises often are followed by a wave of sovereign debt problems. (2) With the euro zone periphery countries already under severe duress, and with a significant risk that default problems will spread east as generous IMF loan programs unwind, it is becoming increasingly clear that this time is not different. Indeed, there is even a palpable risk that sovereign debt woes will result in a partial breakup of the euro zone, a risk that a number of American economists, including Martin Feldstein for whom this lecture is named, have long warned of.