> Now I was wondering if my understanding of what this implies is correct:
> namely that the market takes as a given that after a default, the value of
> these bonds won't go to zero, but will be worth a little more than half
> their face value.
There's a long history to draw upon. During the first period of truly global liberal imperialism in the late 19th century, all the variations of default, renegotiation, default and the use of direct and indirect force were worked out in the core-periphery relation. Pricing sovereign debt was an art that became one of the most significant skills of the London brokers, retained to this day (e.g. our Welsh friend here, DD).
> that a world where sovereign default was common would be no big deal:
> bondholders are already pricing it in and still making a market. (BTW, a
> little over 50% was precisely what Norman thought an aggressive defaulting
> country should shoot for, the best price at which they could hope to
> exchange their debt.)
Sovereign default _was_ common, and looked at over any longer period _is_ common. Yes, and it is no big deal. If the best run sovereign debt operation extracts the maximum possible from the periphery to the core, the total absence of default - given the cycles in capitalism - would indicate that something less than the maximum is being extracted. The default/renegotiation cycle is a _normal_ part of the job (both senses of job), and not a small part of the job, of the bankers.
> It also seems to imply that everything above 56% that bondholders get
> through an enforced non-default is gravy beyond what they've already
> gotten paid for in returns -- a coercive double exaction that is, in the
> worst (and not uncommon) case, very close to being literally a double
> exaction. And one from poor countries to rich bondholders.
I'm sure in the literature there are estimates of long term returns on sovereign debt of the periphery. And despite all efficient market nonsense, if the estimate were honestly done I would be startled if it did not show the surplus you assume. But it would be very difficult to do such a survey, given the multiple ways returns were extracted over long periods of time.
Just to give some idea of how long this history is, I'll paste in below some quotations from (originally the London Investors Manual 1881-1886)
the 1888 American Almanac (I am not good at sending tables in text, so excuse poor margins, alignment etc) .
john mage
Country&Issue Issue Price 1881
1886
Argentina 6%1890 75 102 92
104 101 Will default in 1890, causing the
failure of Barings.
Brazil 5%1903 74 101 94
101 96 Default and renegotiation in 1898.
Egypt 6%1877,now 4% ... 81 69
77 63 Interest being collected by an army of
occupation, good as gold.
Greece 5%1921 74 74 68
64 48 Paid until WWI, then part of the general debt chaos.
Japan 7%1898 92 116 106
118 108 The one big exception to the rule, of course.
Paid in full.
Peru 5%1898 77 22 13
15 10 In default since 1878. In 1890 the bondholders
exchanged the debt for a 66 year lease on all the
mines and railroads in Peru.
There were endless disputes from this, but also lots of cash.
Venezuela 4%,now3% (Consols) ... 41 36 40 29 The result of a previous default & consolidation of
sovereign debt. After this too defaulted, the
British and German fleets blockaded Venezuela in
1902 forcing an "arbitration" in the Hague and a
new round of debt service.