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Countries rarely default, at least not under the basic understanding of the term.
If you or I can't pay our
bills and creditors come calling, eventually we can declare bankruptcy
and painfully move on. Most of our creditors get little or nothing back.
And companies to do it all the time -- indeed, it seems a matter of
course for U.S. airlines.
But countries don't really go bankrupt. They choose to stop paying, one way or another.
The difference? Countries
get new tax payers every day. They are born or they migrate. Countries
cannot become insolvent. They stop paying to save money.
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But countries don't really go bankrupt. They choose to stop paying
Jim Boulden
Jim Boulden
How do they choose to default? Politicians can flirt with financial suicide, as some members of the U.S. Congress are fond of doing. But let's be clear, the U.S. was not going to default. The showdown was just politics.
"The United States has
enormous credibility and is at no risk of default," Anne Pettifor, of
Prime Economics, told me. "In my view there is no possibility whatsoever
of the USA defaulting on its debt."
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So, the USA cannot really
default, thanks in part to a strong Federal Reserve and international
creditors still wanting to buy its bonds, no matter how low the interest
rate falls.
But other countries have
chosen to default, at least in theory. From Argentina to Russia to North
Korea, countries have stopped paying the interest or principle on
domestic or international oblig
In Russia's case, it was
able to pay back creditors within a few years, thanks to the rise of
energy prices. Russia did not walk away from its cred
Argentina was a much
tougher case. When it stopped paying creditors in late 2001, it caused a
great deal of pain for its citizens in 2002-2003. Its efforts to settle
with creditors still bubble up in New York courts. No one can say
Argentina has fully recovered its reputation in the international
markets. Some bondholders simply refuse to take a portion of what they
are owed and move on. They want their money back.
Still its economy grew
quickly within a few years of default. Does that mean that defaulting is
not a terrible step? After all, it means a country can get a handle on
its obligations.
No eurozone country has unilaterally refused to pay its bills
Jim Boulden
Jim Boulden
"The debts become more
manageable and therefore the country becomes more creditworthy,"
Pettifor said. Then, however, "the creditors pile in."
Nazi Germany defaulted
in 1933. The new government was not going to honor the obligations of
the previous leaders. We all know how that went. It was decades before
some of the German debt was paid back in a token way.
No eurozone country has
unilaterally refused to pay its bills. The market made it impossible for
the like of Ireland and Greece to issue new bonds at a sustainable
interest rate. New creditors stepped in, instead of walking away. We
know them as the troika -- made up of the European Central Bank,
European Union and International Monetary Fund.
Greece's meltdown led to
bondholders taking the "haircut," yet the country is set to take
another package of aid. But it can't inflate its currency (it lost that
option when it joined the euro) and can't default (for the same reason).
The latest plan is not
the bailout, but the "bail-in." Look at Cyprus. Bond holders hold off,
the depositors pay up (those forced to bail-in) and everyone holds their
breath hoping the country can rebuild its economy and banking sector
and eventually pay back something.
After all, the troika
expects to be paid back. If not, that would be a default. All this makes
you wonder why the USA would even want to be mentioned in the same
breath or paragraph with these countries.
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