ABSTRACT

Introduction Correctly understood, the sovereign debt is a debt that affects a country taken as a whole, as the set of its residents. Hence, the term sovereign debt stands for a country’s external debt, the two terms being essentially synonymous. The emphasis recently put on what has been dubbed the sovereign debt crisis, notably in the euro area, is therefore symptomatic of a renewed interest in a problem, known as the external debt crisis, that had already puzzled economists towards the end of the twentieth century. The main difference between these two expressions lies in the fact that the term ‘external debt crisis’ was mainly used to define the disorder affecting less developed countries, while the term ‘sovereign debt crisis’ has been widely used only recently to indicate a widespread disorder that affects also a relevant number of industrial countries, notably across the European Union. From a theoretical viewpoint, what matters is that these two expressions define the same concept, that is, the possible existence of a macroeconomic debt of the country itself. This specific topic was initially investigated by Schmitt as early as 1984 in his book Les pays au régime du FMI, where he addressed for the first time the problem of countries’ external debt servicing (Schmitt 1984c). His great discovery, on which he was to work until 2011, concerned the duplication of the charge relative to the payment of countries’ net interest on their external debts. Now, to show that indebted countries have to pay twice the net interest on external debts is tantamount to proving that they are twice as much indebted as they should be. It is therefore not surprising that Schmitt’s analysis was ended up with an explanation of the origin of countries’ external or sovereign debts. This chapter is devoted to his path-breaking discovery of the pathological character of sovereign debts.