There's too much at stake for this to happen. Movement of capital, investments, financial and geopolitical interests and more no longer end at national borders. The global economy is so tightly interwoven that a real bankruptcy would trigger a chain reaction. And so a creative solution is always found. Does this mean that a country can actually continue to accumulate debts and pile up its defaults? In principle, yes, but the country, and in particular its residents and entrepreneurs, will be footing the bill, as emergency loans and debt restructuring each have their price.
It often means that a country comes under some kind of supervision and will only get more money if it puts its house in order. Of course, this has a major impact on those who live, work and do business there. After all, restructuring is usually synonymous with tax increases, rising poverty and unemployment, chaos and a loss of purchasing power.
This is how citizens pay the bill for their government's bad management. It's true that our government is also heavily in debt. However, a country having a lot of debt doesn't automatically mean that it has a higher risk of going bankrupt. Look at Japan.
But because Japan finances its debts mainly at home, through its own banks, pension funds and the central bank, we're unlikely to see Japan go bankrupt any time soon. The Japanese are also strong savers and the country has a current account surplus.
Instead of looking at the amount of the debt, it's more important to look at the debt to GDP ratio, who the creditors are, the amount of interest that needs to be paid, the underlying expenditure investments or consumption , and so on.
Opinions on whether Belgium's level is risky or not vary from economist to economist, although they all agree that the chance of bankruptcy is low as things stand.
And what about the US, which is often written off as virtually bankrupt? But here, too, the picture isn't really black and white. Of the more than 27 trillion dollars of public debt, less than a third is in foreign hands.
Most of the debt is simply on the balance sheet of the Federal Reserve, the US central bank, which has been buying US government bonds on a huge scale for many years now.
Among other things, the Federal Reserve pays for this by printing more money. So, you can see that when it comes to government debt, there's a creative solution to every problem. This article does not contain any investment advice or recommendation, nor a financial analysis. Nothing in this article may be construed as information with a contractual value of any sort whatsoever. This article is intended for information only and does not constitute in any way a commercialization of financial products.
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First we will consider how government debt works by discussing the underpinning issues in sovereign bankruptcy, a distinction between sovereign default and bankruptcy will be made.
Secondly, the statement made by Walter Wriston will be examined by making reference to practical and historical examples to determine if sovereigns can go bankrupt. Thirdly, the lack of any legal mechanism for dealing with sovereign bankruptcy and the practical difficulty of applying existing principles of bankruptcy to sovereigns will be discussed.
Finally, this paper will conclude by establishing that legally sovereigns do not go bankrupt but practically it is possible for them to do so. Underpinning issues in sovereign bankruptcy In order to effectively determine if sovereigns can go bankrupt, it important to understand how public government debts work. Sovereign debt can be defined as 'any debt obligation of or guaranteed by an autonomous government' and such debt obligations can be domestic or external.
Greece is in the same situation as Argentina it was 25 years ago. Countries like Greece, Italy, Portugal and Spain have not developed strong economies to compensate for their fading demographics. When the real estate bubble broke, there were few industries to step in and fill the gap. Unfortunately for the bureaucrats, dissent against the Greek bailout plan is spreading across Europe and leaders can no longer ignore the growing wave of opposition in Finland, the Netherlands, Austria, and Germany.
So, if taxes go beyond a certain pain threshold, people will simply fold their tent and move elsewhere. Those left behind will feel trapped, and as a result, will become very angry at the situation. This anger will be channeled towards any person, company, or entity they feel is culpable in the matter.
In most cases, this will be banks, financial institutions, and government officials.
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