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Foreign. Hi, I'm Andy Tempte and welcome to Money Lessons. Join me every Saturday morning for bite sized lessons that are designed to improve financial literacy around the world. Today is December 20, 2025. Last week we discovered how England built credible institutions after the glorious revolution of 1688, transforming government borrowing from personal prom into institutional commitments backed by English Parliament. While the bank of England initially borrowed at 8% in 1694, Britain's institutional credibility eventually allowed it to borrow at lower rates than its rivals. Rates that dropped to 4 to 5% by the early 1700s, while France struggled with higher borrowing costs driven by chronic default risk. But here's the uncomfortable truth about sovereign debt. Governments can always choose not to pay. Today we're exploring what happens when those promises break. And why broken promises can haunt nations for generations. So picture Paris. In August of 1797. France has endured eight years of upheaval. Revolution overthrew the monarchy. Louis XVI and Marie Antoinette were executed. The Reign of Terror claimed thousands of lives. And now the new government, the Directory, struggles to maintain order. But revolutionary fervor cannot solve mathematics. And France's finances are in a catastrophic state. The revolutionary government inherited massive debts from the old regime wars, royal extravagance and the very financial crisis that sparked the revolution. Then the revolution added its own expenses, fighting European coalitions, suppressing internal rebellions and managing through economic chaos. The Directory faced an impossible honor debts and bankrupt the treasury or break promises and destroy credibility. On September 30, 1797, they chose the latter. The government declared what became known the 2/3 bankruptcy. Here's what this meant. If you held 300 francs worth of French government bonds, the government announced that 200 francs, or 2/3 of that amount, were now worthless. Only 100 francs would be honored, and even that would be paid in new bonds of questionable value. The market's reaction was immediate and devastating. The new bonds quickly traded at just 6% of their face value. If you held one of those remaining 100 franc bonds, you could only sell it for about 6 francs. Bondholders lost over 90% of their investment overnight. Thousands of French families, small merchants, professionals, widows living on bond income, they were financially destroyed. France had chosen immediate fiscal relief over long term credibility. France wasn't the first to learn this painful lesson. Spain provides an even more dramatic example of how defaults create vicious cycles. Remember the Fugger family from last week? Jacob Fugger led a consortium that raised 850,000 florins, with the Fuggers providing about 543 Florida,000 florins themselves to secure Charles V's election as Holy Roman Emperor in 1519. That massive loan was part of a pattern that would haunt Spain for over a century. Spain defaulted on its debts in 1557-1560-1575-1596, 1607, 1627 and 1647. Seven major defaults in 90 years. Each time, Spain negotiated terms promising this time would be different. Each time, Spain defaulted again. Why did creditors keep lending? Well, Spain controlled vast American silver mines and creditors hoped each new government would finally establish some sort of fiscal discipline. But as we know, hope is not a management strategy. And Spain's serial defaults made borrowing progressively more expensive and difficult. By the mid-1600s, Spain, despite controlling much of Europe and the Americas, could barely borrow at any price. The golden age of Spanish power ended not through military defeat, but through financial exhaustion caused by destroyed credibility. Now, understanding why sovereign nations break promises reveals something fundamental about government debt. Private borrowers who default face clear consequences. Creditors can seize collateral, force bankruptcy and prevent future borrowing. But you can't foreclose on France or Spain. Sovereign default is fundamentally different from private default. Now, governments typically default for several reasons. First, wars exhaust treasuries faster than tax revenue can replenish them. France's revolution and subsequent wars created expenses that no realistic tax system could finance. Second, political revolution breaks continuity. New governments often refused to honor previous regimes illegitimate debts as revolutionary France did. And finally, fiscal mismanagement creates unsustainable debt burdens. Spain's repeated defaults showed that even vast silver wealth couldn't overcome chronic overspending. Now, just FYI, we're living a version of this in the United States. Today, our national debt is 120% percent of gross domestic product and we should all be very concerned. Now, what are the consequences? Default provides immediate relief, but imposes severe long term costs. In the short term, it solves whatever cash flow crisis is happening. France reduced its debt burden by 2/3 overnight. Spain repeatedly escaped crushing interest payments. But in the long term, the costs compound. Loss of credibility makes future borrowing expensive or impossible. France struggled to borrow for decades after 1797. Economic isolation follows as creditors refuse new lending, hampering growth precisely when nations need it the most. Domestic investment flees. And why would French citizens reinvest? After losing 90% of their money, Capital fled to more stable nations like England. Political instability worsens as citizens who lost savings blame the government, creating pressure that can topple regimes. Now, these patterns haven't disappeared. Greece's 2010-2015 financial crisis was essentially a slow motion default with creditors eventually accepting that Greece couldn't repay its debts in full. The consequen matched historical patterns, economic contraction, political turmoil, and years of expensive borrowing. The lesson remains consistent. Default is always an option for sovereign governments, but choosing it starts a cycle that's difficult to escape. So here's what makes sovereign default so insidious. It destroys the credibility that's essential for successful government borrowing. England's constitutional monarchy after 1688 created this credible commitment. The government couldn't default without parliament's consent, and parliament represented creditors for the most part. France lacked these institutions. The revolutionary government could default by decree. And so it did. Spain's absolute monarchy could default whenever immediate needs overwhelmed long term thinking. Once destroyed, rebuilding credibility requires decades. Spain needed a century to recover, and France creditworthiness remained damaged throughout the Napoleonic era. Next week, we're going to see how private corporations learned from these sovereign debt lessons. Unlike governments, corporations face bankruptcy, courts and legal consequences for breaking promises. This difference shaped how corporate bond markets developed and why they require different protections. For investors, the fundamental insight remains all debt is a promise. And breaking promises, even when legally possible, carries costs that compound across generations. Until next week, I wish you grace, dignity and compassion. My name is Andy Tempte. This is Money Lessons. You can find the show on all the major streaming services as well as out on YouTube. Please like, subscribe, rate and more. Most importantly, share this public good with your friends, your family, a neighbor, and maybe a colleague. The show is produced by Nicholas Tempte. We'll see you next time on Money Lessons.