When all bailouts, loans, and debt forgiveness fail, a country can declare bankruptcy. This happens from time to time. An early example was England in 1345. Edward III was busy with conflict against France, at the start of the Hundred Years War. To finance his war he borrowed heavily from the Peruzzi and Bardi banks in Florence. When Edward defaulted on his debts he brought down the two banking houses.
More recently, Germany has gone bankrupt twice, in 1923 and again in 1945. It happened in Russia in 1998 and in Argentina in 2001.
Bankruptcy a Last Resort
The German magazine Der Spiegel (November 2008) notes that, “A country has reached this final stage if, as a result of war or blatant mismanagement, it has gambled away all trust, can no longer service its debt or convince anyone to lend it any money, no matter how high an interest rate it promises to pay.”
That’s pretty much the state Greece finds itself in today.
Declaring bankruptcy for a country is a drastic move, and it hits the poor and middle classes hard. The rich are usually able to escape the worst by opening offshore bank accounts.
Der Spiegel reports that shortly before Argentina declared bankruptcy a small armada of men with suitcases crossed the Rio de la Plata, from Buenos Aires, Argentina to Montevideo in Uruguay. Once in Uruguay the luggage was opened to disgorge stacks of U.S. dollars for deposit in local banks.
Argentina Defaults on its Debts
In December 2001, the Argentinean government announced it could not pay back the $93 billion it had borrowed. Then, the government froze all bank accounts; depositors were only allowed to withdraw a maximum of $250 a week. Tens of thousands of people stormed the banks in an attempt to get their money out, but they were too late. When their money ran out people started looting stores.
In December 2001 they gathered in thousands outside the presidential palace and, says Der Spiegel “they banged pots and pans together day and night, until an unnerved President Fernando de la Rua fled by helicopter.” Five more presidents tried to govern and failed over the next two weeks.
Population Seriously Hurt
The pot-banging developed into trashing businesses, particularly banks. Tens of thousands of enterprises folded and the unemployment rate shot up to 25 percent. By May 2003 more than half the country’s population was living under the poverty line while the inflation rate soared to 40 percent.
Carl Mortished of The Times (October 2008) described the situation as “horrendous…In a nation that is a big agricultural exporter, children went hungry and the economy imploded, shrinking by 13 percent in a year. Unable to borrow to pay its bills, the state was forced to cut public sector wages, [and] slash the state pension...”
People who had bought Argentina’s bonds were forced to settle for 35 cents for each dollar invested. But, declaring bankruptcy did give the government some breathing space to restructure the economy.
Recovery Slow and Painful
In August 2011, the Argentina Independent reported that, “Ten years on from its debt default, the Argentine economy is booming: since 2001, GDP has grown by 79.5%, and the government forecasts further growth of 8.2% in 2011. But some are wondering whether this stellar growth seen in Argentina, and in other dynamic emerging economies, is sustainable.”
The European Union has tossed the sinking Greeks a financial lifeline, but some analysts are saying it is too little and too late. Dan O’Brien in the Irish Times says the bailout plan might work “if Europe has lots of luck and lots of economic growth. But in the current circumstances, abundant good fortune and strong economic growth – particularly in the weak and indebted countries which need it most – are too much to expect.”
Sources
- “The Ghost of Argentina.” Der Spiegel Staff, April 11, 2008.
- “Is Argentina’s Economy Overheating?” James England, Argentina Independent, August 10, 2011.
- “Nobody Should Think that Europe is out of the Woods.” Dan O’Brien, Irish Times, October 28, 2011.
Rupert Taylor - Rupert Taylor is the editor of a magazine that provides background to current events.
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