Governments will sink in a world drowning in debt

It is unlikely that Barbados, Lebanon or Sri Lanka ever enters your investment thinking. Perhaps now they should. For although all are minnows in a sea of whales in financial terms, they are – to mix animal metaphors – dead canaries in the coal mine. In the last four years, each has gone bankrupt. Barbados defaulted on its foreign debt when a new government took office in 2018, Lebanon stopped paying after a series of economic crisis in 2020 and Sri Lanka did the same amid an economic meltdown last month.

All three went bust for what are effectively identical reasons, as did Argentina – which in 2020 defaulted for the ninth time in its history – and others. Economists would vigorously disagree, citing various theories instead, but the core problem in all cases is gargantuan government corruption – from elected politicians to lowly bureaucrats – robbing their treasuries and misspending whatever is left, along with woeful tax collection systems. Couple this with a complete lack of confidence in their legal systems and governance by domestic and foreign investors alike, and money flees abroad while economic activity plunges. Thus Sri Lanka, long self-sufficient in food, is now begging for foreign supplies as farmers can no longer afford to buy seeds or plant crops.

Sovereign default is a vague term, but one that can be defined as the failure by a government to pay