Happy Days For Prophets Of Doom
By Jim Taylor
10 March, 2009
Countercurrents.org
According to the doomsayers, 16 nations teeter on the brink of bankruptcy. Some may have already fallen over the edge.
Iceland's government, for example, invested the little nation's wealth too heavily in the credit bubble. For a decade or so, Iceland enjoyed prosperity, low taxes, a high standard of living, literacy…
Suddenly, poof!
It's like Cinderella's fairy godmother, in reverse.
According to the experts, Latvia, Romania, Hungary, the Ukraine, and 11 other countries may also go belly up, financially.
Less than a year ago, many of these countries were praised for their economic miracles. They had emerged from Soviet repression. They had embraced democracy and free market ideology – often treated as synonymous – and they had been welcomed into the European Union.
Now the European Union itself is threatened, as former Eastern Bloc countries hope for handouts, and the wealthier Western members balk at bailing out their Eastern cousins.
More questions than answers
Interestingly, none of the lists of countries threatened with bankruptcy seems to include the world's poorest countries – such as Haiti, Malawi, Somalia … Does that mean that they despite their poverty, they are still paying off their creditors? Or are they already beyond hope?
The whole process raises more questions for me than answers.
On the surface, bankruptcy sounds straightforward.
You can't pay your debts. Instead of carrying an crushing debt load – or committing suicide – you declare yourself bankrupt. A court appoints a trustee or receiver to dismantle your assets. Your creditors collect what they can, usually just a few cents on the dollar. You start again from zero.
That's how it works for individuals. Under Canadian law, you can keep a ridiculously small equity in your house and other possessions. Everything else is stripped away.
But how does that work when a country goes bankrupt?
The first nation to officially default on its debts was Spain, in 1557. At the time, King Philip II ruled the most widespread empire the world has yet known – greater even that the later British empire.
But Spain suffered from expensive military campaigns against the Dutch and Ottoman empires.
So Philip refused to pay his country's debts. He found the tactic so successful that he did it three more times before he died in 1598.
Germany went bankrupt in 1920, unable to pay its war debts and reparations. Historians claim that its economic collapse led directly to the rise of Hitler and Nazism.
Most recently, Argentina went bankrupt in 2001. With a fresh start, Argentina became this century's poster child for economic renewal. But now it too is threatened by bankruptcy.
Who collects what?
So what's going on here?
If a country can't pay its debts, what do the creditors collect? And who oversees the division of spoils?
Let's take Iceland as an example, since everyone seems to agree that it is on the rocks.
Iceland today has exactly the same physical assets it had before the economic crash -- the same educated and literate population, the same volcanic geography, the same fishing grounds. Only its theoretical wealth has changed.
Britain would love to grab those fishing grounds. It waged three short-lived wars over them in the 1950s and 1970s. But could an international arbitrator strip away Iceland's territorial rights and give them to someone else?
Could such an arbitrator rule that Iceland's people must move to New York and work for Warren Buffet to reimburse Wall Street?
Iceland straddles the Mid-Atlantic Ridge. The earth's molten core is closer to the surface in Iceland than almost anywhere else. Could the European Union take over Iceland and provide cheap geothermal power for its member nations by tapping deep into the magna?
Possible, perhaps. But unlikely.
Nothing worth collecting
And what about financially crippled nations with few marketable resources? Why would any creditor want to take over Haiti or Malawi? Who would seek responsibility for ten million or so illiterate, uneducated, starving people? To say nothing of the world's highest incidences of HIV/AIDS.
Afghanistan has strategic value. And also, arguably, the world's most fractious people. The mighty empires of Alexander the Great, Britain, the Soviet Union, and now NATO have all failed to control it. Who would risk buying Afghanistan, even at fire-sale prices?
The biggest creditor, for most of these troubled countries, is the International Monetary Fund. Does the IMF become the de facto government of bankrupt nations?
I'm not an economist. So I stand to be corrected. But it seems to me that when a nation goes bankrupt, the biggest impact is on its credit rating. Standard & Poors dropped the Ukraine's rating to “CCC minus” – about equivalent to my granddaughter's piggy bank.
But over-extended credit got these nations into trouble in the first place. A poor credit rating doesn't preclude others from investing in pipelines or oil wells. Maybe S&P did the Ukraine a favour.
For nations, it seems to me, bankruptcy is mainly a humiliation. They have to start living within their own means. Is that a bad thing?
A nation's bankruptcy may, in fact, be as imaginary a concept as its supposed wealth was six months ago.
Jim Taylor is a freelance writer/editor who lives in the Okanagan Valley in Canada. You can subscribe to his free weekly columns by writing him at [email protected]
