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Can a country go bankrupt ?

Community Veteran
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Registered: 02-08-2007

Can a country go bankrupt ?

Iceland is currently refusing to repay money owed to the UK for bailing out their banks. Portugal, Greece and Ireland may also reach a point in time where it's citizens say enough is enough and refuse to pay money owed to the IMF or other countries.
The Question is can a country be declared bankrupt and if so what are the likely consequences for countries such as those mentioned ?
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Community Veteran
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Registered: 10-09-2010

Re: Can a country go bankrupt ?

Iceland is bankrupt.
However from what I've read you are wrong about them not paying back the UK, they are I believe paying the UK, just slowly.
Consequences are that the country cannot borrow any money.
Community Veteran
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Registered: 12-08-2007

Re: Can a country go bankrupt ?

I don't think a country can be declared bankrupt but if they can't borrow more money from the IMF/EU then that is technically the situation they will be in.
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Re: Can a country go bankrupt ?

At the second time of asking, the population of Iceland have decided not to do what the politicians wanted, and to bail out banks, the UK and Netherlands.
The mistake the Icelandic bankers made was to 'borrow' low risk money cheap (Icesave), the lend it out at higher rates higher risk to allow the buy out of Companies like Iceland (Supermarket). Effectively borrowing money at 7% (from the Dutch and British) to lend out at 12% to buy an asset (Supermerket chain) with a yield of 4%. The figures just didn’t add up.
What was inexcusable was the Icelandic government would honour the banks borrowings (without checking). What was doubly inexcusable was the UK Financial Standards Authority (without any checking) endorsed the Icelandic Government promise (as did the Dutch equivalent).
I was pleasantly surprised by Iceland, I had a 4 month contract there last Autumn, fair pay in a currency that was exchangeable. Iceland has a lot going for it, population a bit more than say Bradford in a land mass marginally smaller than England, has some excellent Salmon fishing, Good fish stocks, a diverse agriculture sector (export bananas from the geothermal hothouses – so a true banana republic Grin), huge aluminium smelter (run by Rio Tinto - Alcan), virtually free geothermal and Hydro electricity (one of the geothermal plants could if need be power the whole country), a strong tourism sector.
Every where I travelled in Iceland there was 3G mobile, every farm house I visited had broad band > 6MB.
It’s not a bed of roses, there are 6-7% unemployed, mostly eastern Europeans who came over for employment in the boom times.
What surprised me there were only about 25 Beer and Liquor outlets in the whole country
Must admit, I put money into Icesave (but only up to the FSA protected limit) because it was a good rate of return AND it was covered by the FSA guarantee (without the FSA guarantee I would not have invested in Icesave)
The underlying question is:- should the likes of RBOS be bailed out by the State (ie the taxpayer), and if the State fails who pays the debts?
Community Veteran
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Registered: 10-09-2010

Re: Can a country go bankrupt ?

Should the state bail out banks?
That depends an awful lot on what version of the question you are asking.
One version would be, should the state bail out banks to stop the economy from collapsing?
Another version would be, should the state bail out banks, allowing those that messed up to retain their jobs and saving the investors from huge losses?
Dividing those two questions is very difficult, but in isolation I answer yes absolutely to the first, and no, don't even think about it to the second.  But can any government actually be yes to the first and no the second?  I doubt it, although they could probably do a better job than they have.  Having said that, the UK governments bank bailout (Gordon Browns master plan) was one of the better versions in so much that the major bail out recipients also saw their shareholder base massively diluted and giving the tax payer a potential asset in terms of owning a large part of the banks.
But I do feel a better job could have been done in terms of handing bank bankruptcies like railway bankruptcies, in railways, there is primary legislation that recognises that trains must run even if the companies running them are bankrupt.  What happens in their cases is that in effect an official receiver takes over the railway company concerned and gets (with constraints and oversight) underwritten by the state.  However the original investors loose all and the management team can fire and hire who they want, enabling them to get rid of whoever is responsible for the bankruptcy (assuming its that simple).
However, of course, had all the investors lost all their money invested into the banks, that would of course have hurt the little guy as well as billions are wiped out from our pensions, which of course will increase the burden on the state as more people end up in hardship.
Saving banks is a fraught business and full of moral hazard, but on balance, not saving banks is far worse.  Had RBOS been allowed to fail, then every company that banked with them would have lost their money too, millions would have found themselves unemployed over night, and those that didnt bank with RBOS would never get paid by RBOS customers, driving more companies to the wall, the massive increase in unemployment and business failures would have caused a recession that makes the current one look like a walk in the park, government spending on social services would have sky rocketed whilst at the same time tax revenues would have fallen by massive amounts (think 100% increase in social spending, and 60% decrease in tax revenues) the cuts and hardship that would follow that would have been draconian, think 50% of civil servants out of their jobs and perhaps things like the armed forces mothballed almost in its entirety, whilst unemployment benefits being cut in half.
So, in general should governments save failing banks?  Yes.
As for Iceland, I've not read anything about it recently, but I understood from what I read a few months back, the plebiscite was non binding on the parliament, and that parliament would repay the debts because if they don't they will enter the situation the soviet union was in for many years, in which it could not borrow money at all until it had honoured those old debts.
And also commenting on Iceland, again the government had no real choice but to save the banks, had they not, given that it was all of the Icelandic banking system that was bankrupt, unemployment would have hit near 100% and nobody, not even the government would have had any money to pay anyone.  That Iceland is still a pleasant place to live is down to the fact that the government taking over the banks, regardless of how Icelanders feel about it, they are better off owning and operating the bankrupt banks than without, and they are better off honouring the banks commitments than not.
Community Veteran
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Re: Can a country go bankrupt ?

If banks know they will always be "saved" by the government then they are free to carry on like they have done in the past.
It's certainly true the present government is attempting to make changes to the banks but in turn they are threatening to move abroad which would still allow them to carry on as usual.
No bank should be allowed to gamble with savers money to the extent they have been allowed to.
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Re: Can a country go bankrupt ?

Quote from: gleneagles
If banks know they will always be "saved" by the government then they are free to carry on like they have done in the past.
It would be perfectly possible to save the bank yet sack all the senior management, indeed I'm at a loss to understand why this hasn't been done.  None of Railtracks senior managers continued to work for Network Rail.
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Re: Can a country go bankrupt ?

Guardian this morning - interesting
http://www.guardian.co.uk/commentisfree/2011/apr/12/iceland-ireland-portugal-markets
After its three biggest banks – 85% of the country's financial system – failed in the same week, Iceland did two remarkable things. First, it let the banks go under: foreign financiers who had lent to Reykjavik institutions at their own risk didn't get a single krona back. Second, officials imposed capital controls, making it harder for hot-money merchants to pull their cash out of the country.
These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.
Community Veteran
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Registered: 10-09-2010

Re: Can a country go bankrupt ?

I didn't know about the currency controls, but makes great sense, and good to see that they only covered normal banking deposits and I guess inland bank lending... of course, had the bank been larger, refusal to pay their loans could have sent other foreign banks over the edge too (maybe they did).