Going bust is not always the end of the world. In fact, it has its advantages
Πηγή: IP GLOBALby Heribert Dieter | 28.06.2010
Eurozone governments did everything in their power to prevent Greece’s bankruptcy. It remains unclear, though, why Brussels and other capitals are so worried about the default of an E.U. country. Bankruptcy is probably the best way to rescue a national economy from excessive debt. The current discussion is rife with misunderstandings.
One. State bankruptcies are rare
This is not true—unfortunately. Economic history is replete with instances of national bankruptcy. A few countries have even gone bankrupt several times, though others have never had to take this step. Between 1550 and 1800 France declared insolvency eight times, and French kings were fond of solving the problem of excessive debt by beheading their most important creditors. 250 cases of state bankruptcy were recorded for the period 1820–2004. And it was not always the same national economies, either: a total of 106 different states defaulted in this period.
Mexico’s default in 1982 was followed by 70 other national bankruptcies, of which 34 involved African countries and 29 struck states in Latin America. Prior to the Latin American debt crisis, it was commonly believed that states could not become insolvent. In the late 1970s, Walter Wriston, longstanding CEO of Citigroup and one of the most powerful bankers in the world, remarked tersely: “Countries do not go bankrupt.” In formal terms, he was right. States remain solvent if their debts are not denominated in a foreign currency. But after considering whether the political and economic costs are higher for servicing the debt or for defaulting, the political leaders of a country may decide to halt payments of interest and principal. In other words, states can indeed become insolvent. In the midst of a crisis, though, their actions are above all determined by an unwillingness to pay rather than an inability: governments, especially democratically elected ones, are often reluctant to impose new sacrifices on their citizens.
