Here is a most interesting article about the repayment of sovereign debt, or rather: how sovereign debt often gets repaid only centuries after the fact, if ever. A couple of points:

* the UK government announced recently that it will repay £218 million from the £2 billion of debt that it incurred during WW1. Note that this is debt from roughly 100 years ago!

* incredibly, some of the debt which will now be repaid goes back as far as the 18th century! It includes “the capital stock of the South Sea Company originating in 1711, which had collapsed in the infamous South Sea Bubble financial crisis of 1720”,according to the UK Treasury.

* Germany paid off the last portion of its debt stemming from WW1 in October 2010! Ponder this: a country which had experienced decades of “Wirtschaftswunder” and which had become extremely wealthy had still been owing debt from 100 years ago during all this time!

* and, of course, Greeks will argue that Germany still hasn't paid the forced loans from WW2 (and they have a point there, in my opinion!).

This reinforces a point which I have tried to make forever: the principal issue with debt, not only sovereign debt, is not that it gets repaid. The principal issue with all debt is that it gets 'regularized'. Sovereign debt in the Eurozone presently stands, I believe, around 90% of GDP and everyone is concerned that this indebtedness may even go up. Markets are nervous; many predict a collapse caused by this debt. But suppose, for a moment, this debt would be increased, in one stroke, to 120% of GDP with the only proviso that the entire debt would be structured in such a way that it doesn't have to be repaid for the next 100 years. Put differently, the debt would be totally 'regularized'; that is: no one would have to worry about pending defaults, etc. I would bet that everything would return to normal rather quickly.

Another point which comes across in the above article is that too early a debt forgiveness may not be smart. Suppose Germany, back in 1953, had not been forgiven its debt but, instead, repayment of that debt would have been extended to 50 years or so. There can be no doubt that the Germany of the 1990s or the 2000s could easily have handled what now seems to be a relatively small amount of WW2 debt. After all, this is a country which could afford to spend more than 2 trillion Euro, so far, in the aftermath of unification.

I have a vague memory of New York City's financial crisis back in 1975. The City was facing bankruptcy and the Federal Government under President Gerald Ford refused a bail-out (newspaper headline: “Ford to City: Drop dead!”). There was a financial alchimist, Felix Rohatyn from Lazard's, who advised NYC and managed to avert bankruptcy. One day, the 'rescue of NYC' was announced; everything was fine again. I was wondering at the time how NYC could find so much money so quickly to repay its debt. Well, the City hadn't repaid a single dime; it had simply restructured and 'regularized' its debt.

There are probably only few countries in the world whose sovereign debt today is lower than, say, 20 years ago. So, from the standpoint of cash flow, most countries have added to their debt and not repaid any of it (whenever they paid debt on maturity, they did so with new debt which they could raise). As a result, sovereign debt always has a sort of perpetual character. The real issue as regards debt sustainability is whether the payment of interest is within the borrower's capacity. But even if that were not the case, there are alchimistic solutions for it. For example: the interest rate can be set below market and a good portion of it can be capitalized, if not all. As long as the debt gets'regularized'…

Perhaps the even greater problem than sovereign debt not getting repaid is when sovereign debt does get repaid. In the last years of the Clinton presidency, the US started to accumulate very large budget surpluses. In 1999, Clinton announced that the national debt would be totally repaid by 2015. There was great worry in financial markets: What should the world's liquidity do when there were no longer risk-free US Treasuries to invest in? What would that mean for the stability of financial markets? President Bush then solved that problem in a hurry by making tax cuts for the rich and by starting two wars. And the world seems very happy today that there are so many US Treasuries in the market, safe havens for flight capital in times of nervousness.