Default, rescheduling and inflation: public debt crises in Spain during the 19^th and 20^th centuries

Abstract

This article provides a historical overview of the factors leading up to debt crises and the default mechanisms used by governments to solve them, ranging from repudiation and restructuring to inflation tax and financial repression. The paper also analyses the Spanish governments' graduation to responsible public debt management under democracy and the last debt crisis starting in 2010. After analysing the evolution of the outstanding public debt, budget deficits, the Spanish economy's ability to borrow, the central government's debt affordability and the profile of public debt, the article concludes that the Spanish case confirms the main hypotheses of concerning international debt crises: short-term borrowing enhanced the risk of a debt crisis; insolvency problems arose when governments were unwilling or unable to repay debt; debt crises took place after large capital inflows; most outright defaults ended up being partial defaults; public debt level became unsustainable when it rose above 60-90 per cent of GDP; default trough inflation became commonplace when fiat money displaced coinage; financial repression was used as a subtle type of debt restructuring; and defaults endangered the creditworthiness of the Spanish Finance Ministry and forced disciplined fiscal policies.Keywords: public debt, default, restructuring, inflation tax, financial repression, fiscal policy JEL Code: E31, E4, E6, F3, F4, H6, N10, N23, N43, H63, F34 * Received 13 May 2012. Accepted 6 September 2012. I am very grateful to Pablo Martín-Aceñ a, Elena Martínez and María Á ngeles Pons for inviting me to deliver this paper to the two conferences they organised on financial crises at the Pablo de Olavide University in Carmona (Seville) and at the Fundació n Areces in Madrid and for their helpful comments. I would also like to thank the participants at these conferences for their useful suggestions and comments, especially Gerardo della Paollera. Finally, I wish to thank Leandro Prados de la Escosura, Andrés Hoyo, Javier 353 RESUMENEste artículo proporciona una visió n histó rica de los factores que crearon las crisis de la deuda y de los métodos utilizados por los gobiernos para resolverlas: el repudio, la restructuració n,el impuesto inflacionista y la represió n financiera. También analiza la graduació n de los gobiernos españ oles en la gestió n responsable de la deuda pú blica en la democracia.Se analiza la evolució n de la deuda pú blica en circulació n, los déficits presupuestarios, la capacidad endeudamiento de la economía españ ola y del gobierno, así como el perfil de la deuda soberana. El artículo concluye que el caso españ ol confirma las hipó tesis principales sobre las crisis internacionales la deuda con respecto a: los préstamos a corto plazo aumentaban el riesgo de las crisis de la deuda; los impagos ocurrieron cuando los gobiernos no quisieron o no pudieron pagar la deuda;las crisis de la deuda tuvieron lugar después de grandes entradas de capital extranjero; las bancarrotas acabaron convirtiéndose en restructuracion...

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