Okay, maybe investing the whole country’s assets
into Dogecoin wasn’t the best move. No need to point fingers here - but the treasury
is empty. The whole country is broke, the people are demanding supplies,
and the creditors are at the door. There’s only one thing left
to do - declare bankruptcy! But what happens when a country
declares bankruptcy exactly? Most people have probably only heard of
bankruptcy in terms of businesses and individuals - such as when a beloved local food
chain closed up shop. Rest in peace, Steak & Ale, your lunch specials won’t be forgotten. Or
when Uncle Billy’s gambling debts got a little too high and his whole family had to throw in
the towel on their payments. But those people rarely have too much power to determine
the terms of their bankruptcy, and the banks usually make sure they get as much as they
can out of them before the debt is wiped clean. National bankruptcy is a very
different matter - because who has more power than an actual head of state? A country’s bankruptcy is actually called
sovereign default - and it basically boils down to the country no longer saying “I’m good
for it, the check’s in the mail” and switching to “Actually, I’m not good for it and you can’t make
me pay”. The government usually owes a lot of money to both domestic and foreign debtors, and
they simply announce that they’re defaulting on the debt and no more payments will be coming.
They can publicly repudiate their debts, or just stop paying and let everyone
figure it out as the cash stops coming. But what could bring a
country to these dire straits? Many countries run a national debt, but most are
at least able to make consistent payments - even if in some countries, the debt only seems to
go up. But if you’re paying the older creditors first and making payments in a timely fashion,
that’s just the cost of doing business. Even so, multiple things can cause a debt to spiral out
of control, and once a country’s gross national product goes down enough, the interest on the
debt becomes incredibly daunting and the country enters terminal debt - when the payments don’t
equal the interest and the debt keeps going up even without borrowing something new. Then
the only way out is to simply flush the debt. But circumstances can sometimes
make things much worse. Many of the countries that default on their debts
are the architects of their own misery. They made poor investments, didn’t take enough care of
their own financial sector, and lent money to the wrong people. A history of this behavior can
lead to a poor credit history, which makes it harder to get future loans. But outside factors
can also cause debt to spiral out of control, such as when a major part of the market the
country relies on is disrupted. If your country has one major export, a bad season for crops
or a disaster in the shipping sector can throw a whole year’s profits out the window. And then
there’s the danger of inflation, which can devalue a nation’s currency and mean that one dollar pays
off a much smaller portion of the debt than usual. And that was never more clear than in 2020. When the entire world shut down due to Covid-19,
whole countries saw their economies grind to a halt. Millions of people were out of
work, and many countries saw no other way to keep public order than to print an
enormous amount of money for relief efforts. This caused heavy inflation in multiple
countries that the world is still dealing with, and even today we see major shipping delays due to
cities suddenly locking down and halting commerce in its tracks. The US hasn’t had to default on any
of its debts due to the pandemic - its coffers are way too deep for that - but it hasn’t stopped
economists from looking nervously at the charts. But there’s another reason nations
might default on their debts. It’s good old politics. Many countries racked up
extensive amounts of debt when they were under colonial rule, or had more powerful nations
set the terms of trade. The national debt is a source of resentment for the people, and when
a new populist government takes charge - be it through an election or a revolution - one of the
first things they do is declare a new constitution complete with the power to discharge the national
debt. There’s a lot of celebrating in the streets, followed by a lot of hard questions about
exactly what that means for future trade deals. In this case there are two
primary kinds of state bankruptcy. The first, insolvency, is the more common
of the two. It’s usually a situation where the state has hit rock bottom and would be
devastated by trying to pay off its entire debt. This is usually a combination of heavy public
debt, lower tax revenue due to high unemployment, a declining stock market, and a public
that would revolt if harsh austerity measures were instituted. So the government
basically announces that they won’t be able to pay off their full debt, and try to
negotiate a settlement that will either forgive some of their debts or allow
them to pay them off at a slower rate. But some states are in an even worse fix. Illiquidity is when the state is in a
more serious immediate financial crisis, and can’t liquidate assets fast enough to even
meet its interest or principle payments in the next cycle. This is an imminent default, and
usually requires a full halt of payments until enough assets are freed up. While this might seem
more serious, it’s also often much more temporary, and states often try to negotiate a temporary
halt without asking for their full debt to be discharged. The tricky part is that it’s not
easy to prove whether or not this is genuine. But in thorny political climates,
another x-factor emerges. Post-revolution, or an election that might
as well be a revolution, some states not only stop paying their debts - they might take
the property of the people they owe money to. This is a concept called odious debt, which
states that debts incurred by a despotic regime are the responsibility of the regime rather
than the country. While this is intended to relieve a people free of a dangerous government
of its obligations, it can be used in other, less conspicuous ways- such as when the
Confederate States not only disavowed their debts to the union, but seized a military
fort belonging to the federal government. But there’s no such thing as a free lunch. So what actually happens when a country
calls it quits on its debts? For civilians in the United States, there
is usually a structured process to clear the debts and get back into good standing. For
individuals and businesses who have hit rock bottom and need a fresh start, the most common
type is Chapter 7, which is basic liquidation. The debtor signs on the dotted line, their assets
are seized by the authorities and liquidated, and used to pay off as much of their debts as
possible. It’s unlikely that any business that declares this will still be around unless they’re
purchased, and any individual who declares Chapter 7 will likely be forced to forfeit any significant
assets including their house in many cases. Of course, it's good to be a
big gun in some situations. Say you’re a powerful businessman or individual
who made some…questionable investments. That darn Dogecoin again, maybe. Your income stream has
gone bust, you’re heavily in debt, but you know it’s only a little while before you’re back on
top. That’s when it’s time to declare Chapter 11, aka the rich man’s bankruptcy. This is a
rehabilitation or reorganization bankruptcy, most commonly used by businesses. The company
undergoes a significant financial reorganization and may have to sell off some assets, but
remains functional as it repays its debt. Some of the biggest names in business
have declared bankruptcy multiple times, including a certain former President. And for unusual cases, the
government has a plan as well. Chapter 9 is reserved for municipal bankruptcy,
when a town or city goes bankrupt and needs to get out from under state or federal debt. This usually
involves a monitor retooling their finances, but it’s rare for a municipality to simply go
away. Chapter twelve is a special bankruptcy dispensation for family farmers and fishermen
that is likely to let them keep the assets that allow them to make a living. And
then there’s chapter 15, which handles complex cases of international debt and allows
cooperation with foreign bankruptcy courts. But how do you enforce a bankruptcy
ruling against a whole country? The answer is in most cases…you don’t.
National bankruptcies really aren’t arranged bankruptcies but simple defaults on
the debt. Anything that happens beyond that is more a question of diplomacy, and what the
country that’s defaulting can agree to based on their assets and their national climate. And
while it may feel like the right thing to do for a country drowning in debt, the consequences of
sovereign default can be nasty. Right away, they start feeling the impact in more ways than one -
and it can sometimes make a bad situation worse. But the problems don’t stop there. For one thing, the creditors are hit immediately
- and this can create a cascading effect. If a creditor has lent a significant amount of
money to a country and it gets defaulted on, it affects the creditor’s ability to lend
out money to other clients. When it comes to a national scale, this can mean many countries
go without vital assets. This is why repaying creditors in some form is usually the first step
in attempting to resolve a sovereign default, and brings a lot of people to the negotiating
table. Creditors often accept a low-ball offer from the defaulting country to get what they
can, although sometimes they hold out for a change in government to try to get a better
deal - but that can come with major risk. And it hits the state harder than anyone. The state might dismiss its financial obligations
when it defaults, and that frees up a lot of money in the coffers. But the good times don’t last
- if they ever start. Few things will hurt a state’s reputation with its creditors more than a
default, which might make it next to impossible to get future loans. Not only that, but it can cause
serious diplomatic consequences if the state owes heavy debts to other countries. In the best of
circumstances, it might make it harder to trade with those countries in the future. In worse
scenarios, the value of the state’s currency in international affairs might go out the window and
the leadership could find themselves ostracized. And this can trickle down to the citizens - badly. If the state defaults on its debt, the leadership
might think this would resolve its financial problems. The reality turns out to be anything
but rosy. The state still has empty coffers and limited assets, the people have needs, and the
government might be toppled if they fall down on their basic duties. This often leads to the
government ordering the printing of more money, which solves the immediate issue - but leads
to heavy inflation and hurts the country even more in international trade as their currency
gets devalued. In moderate situations, this makes the cost of imports much higher. In worse
cases, like in Zimbabwe, it can result in bizarre scenarios like people paying with wheelbarrows
of near-worthless currency to buy food. And this can create a cascading effect. If the state defaults on all its
debts, including domestic debts, banks might have to write down massive debts and
cause a banking crisis. This then spins out into a larger economic crisis as people panic and
withdraw their money from the banks. The stock market tumbles, and panic leads to panic as
the public’s fears make a bad situation worse. As the currency decreases in value and
the faith in the government does as well, the country is more likely to suffer through heavy
unemployment, austerity, and criminal activity. But the consequences of a sovereign default
depend heavily on the prestige of the country. Phillip II of Spain was a powerful king in
the 1500s, but financial skill wasn’t his best asset. He wound up defaulting on
debt four times between 1557 and 1596, and each time the full hit wasn’t taken
by the Spanish crown - but by the powerful Fugger banking empire in Germany, which had
heavy investments in the Spanish crown. With no way to enforce a judgement against a powerful
monarch with the western world’s mightiest armada, the Fuggers took the loss and eventually
folded, ending a financial empire that spanned centuries leading to the
banking world being thrown into chaos. And in more modern times, it’s common
for countries to get in over their heads. The 1800s was a chaotic time, as
many former colonies gained their independence from world powers and had to
sort out their economies for the first time. That included several Latin American countries,
who went to the London bond market to get loans. They quickly found their debts spiraling as the
interest racked up. But as the bondsmen mainly wanted to get their money back, they were
open to renegotiating the loans and setting up long-term repayment plans - and both sides
kept the opportunity for future deals wide open. But a hundred years later,
new problems would emerge. In the 1920s, as a financial crisis
hit the globe - most famously, with the Great Depression in the United
States - many countries started instituting protectionist policies. Tariffs rose,
international trade decreased, and that unbalanced many countries’ economies. Those that
relied heavily on exports to fill their coffers found themselves struggling to pay off their
debts. Most notably, Chile in 1932 hit terminal debt when its scheduled repayments were higher
on average than their entire exports. However, the world would soon have much bigger
concerns - World War II was coming. But even in the modern-day,
major nations can go bankrupt. The entire world was rocked by a massive financial
crisis again in 2007 and 2008 that left very few countries unaffected. However, one country
which suffered more than many others was Greece, which suffered the longest recession
of any advanced economy to date - and it devastated just about every area of
life. The government debt rose rapidly, investors lost confidence in the
Greek economy, and the government had to raise taxes a whopping twelve times. No
surprise, that led to significant social unrest ranging from massive protests to violent riots.
The government quickly tried to restore order by getting bailout loans from multiple groups
including the International Monetary Fund. That should take care of things…right? The government of Greece tried to
negotiate its way out of debts, getting private banks to agree to a 50% cut on
the value of their debts. This was a debt relief of a hundred billion Euros - and it didn’t do much
good. The government was still massively in debt. They proposed new austerity measures to repay
their obligations, but the public rejected them in referendums. The crisis dragged on and on to
2015, with Greece ultimately defaulting on its International Monetary Fund loan - the first
developed country to ever do so. This caused stocks worldwide to tumble, people worried that
Greece might pull out of the European market, and options were limited for relieving the crisis.
You can’t get blood from a stone, so Greece was able to negotiate new terms for many of its
debts. Their overall debt is still high, but by 2021 they were selling thirty-year bonds again
for the first time since the financial crisis. Of course, to resolve a debt crisis, you
have to have a country wanting to pay. Venezuela had been a thorn in the side
of the United States and its allies for well over a decade. First the fiery
left-wing leader Hugo Chavez took control and sought to create an anti-American bloc
in South America. He was succeeded by his protege Nicolas Maduro who became more
authoritarian and increasingly isolated Venezuela from the global economy, racking
up the country’s debt. As its debts rose, its economy crashed, and things only seemed
to be getting worse. Sure enough, in 2017, it defaulted on its debts and creditors around
the world struggled to figure out their next move. Is there any way to actually force
a country to repay its debts? Bond holders do have power in the global market,
and if enough holders of a bond call in their chips, it can create a cascading effect. But
that’s not always possible - especially in a country like Venezuela, where they likely do not
have the money on hand to pay even a fraction of their debts. As the grace period faded and the
Maduro regime showed no intention of paying up, the country was suffering far more than
its debtors. It had struggled to provide enough food or medicine for its citizens,
resulting in massive lines for basic goods. But Venezuela does have one asset that could
help it dig itself out of this debt hole. Under international law, creditors do have
the ability to seek relief for their debt by seizing the assets of the country that owes them
money. This is only feasible if the country has a significant amount of exports that can be taken
from ships and ports, and Venezuela does have one in particular - oil and lots of it. It’s
their primary export, and one that maintains its value and helps them forge diplomatic
relations with other America-skeptic nations. So why haven’t creditors called in their chips
and held Venezuela accountable for its debt? Because that could make a bad situation
much worse - cutting off the country’s primary income stream and making the country’s
humanitarian crisis spiral out of control. But what happens if things escalate? Of course, foreign debtors have one more
option for trying to recoup debt from a country that is refusing or unable to pay it -
declare war. This is usually a last resort for creditors for a number of reasons. For one thing,
a successful invasion is likely to devastate the invaded country even further, making it harder
to recoup the assets. And if the country doing the invading puts the needed resources into
it, it may cost a lot of money - potentially, much more than the actual debt. Finally, this
would worsen the relationship between the two states and make negotiations harder - so the
only way to force concessions out of the debtor may be a costly, internationally condemned
occupation or even a full annexation of the country. All of these options might cause so
much hardship in terms of money and lives lost that the creditor nation might be more
likely to just write off the debt. But that’s not to say it hasn’t happened. When the Confederate states seceded from the
United States in 1861, the Union was split. Some wanted to invade and take back
the southern half of the United States, while others thought the issues between the
two regions were irreconcilable and a national divorce might be the best approach to ending
the conflict. That debate largely ended when the South attempted to seize Fort Sumter
and went on to be completely defeated and reincorporated into the United States - although
there was a silver lining. After the United States ratified the 14th Amendment, they repudiated
the debts held by the Confederate States. But in most cases, the countries are
motivated by a number of factors. Why do companies repay their debts when they go
bankrupt instead and just wipe the slate clean? The first reason is usually fear. A country
that defaulted on its debts will make a lot of powerful enemies - and may want
to avoid long-term consequences. Yes, there’s the risk of military intervention, but
the country could also find its assets seized abroad by order of foreign courts, or find its
currency blacklisted from international markets. Either of these punitive economic
measures could destroy their economy and could cause more damage and have
longer-lasting effects than even a war. But sometimes, countries apply
to the debtor’s better interests. There are few things more valuable in
international relations than your reputation, and many creditors leverage that to
get their money back. It’s the classic puzzle of the carrot and the stick - if you
threaten the debtor with harsh reprisals, you might get the money back - or you might
get nothing and burn your connections with the country. That’s why many countries
choose instead to work with the country that went bankrupt - arranging a payment
plan and even providing more immediate relief to help the country get back on its feet. By
eschewing retaliation of any kind, the creditors invest in the country’s future and put themselves
in prime position to benefit after the recovery. It’d basically a national Chapter 11 - but what
about the national equivalent of a Chapter 7? When a company files Chapter 7, they usually
cease to exist altogether. The company’s debts are discharged, and their assets are liquidated
to pay off their debts. But you can’t simply abolish a country - or can you? It’s pretty rare
for a country to be abolished in the modern day, although there was one example that made
news around the world - the Soviet Union. The massive empire collapsed in the early 1990s,
and had a massive debt when it did. Russia endured but much of the empire split into new countries
that had to start from scratch without a powerful nation pulling their strings. And in the immediate
aftermath, creditors around the world had to scramble to figure out - who owes them what?
While some tried to get payment from the newly democratic state of Russia, their finances
were not in the best of shape. New nations like Ukraine, Estonia, Georgia, and Kazakhstan
inherited some of the debt, but the chaos of trying to figure out the economics complicated
any attempt to recoup most of the debt. So no one is going to put a for-sale sign on the United States any time soon - but is
the country in danger of a default? Surprisingly, it’s come rather close in
recent years. But the culprit wasn’t a war, or a recession, or a change in government.
It was one of the oldest plagues of the US government - politics. The United States
has a debt limit, capping the amount of money the government can borrow. The US
frequently borrows money to pay money, so every few years they vote to raise the debt
limit and move ahead with business as usual. Sounds like a healthy way to run an economy. But
in recent years, Republicans have started to balk at raising the debt ceiling, causing legislative
standoffs. More than once, the US has come within days of defaulting on its debt - which could cause
financial earthquakes throughout the world. The US is seen as one of the bulwarks of the global
economy, and if its debts can’t be counted on, it would likely have a lot of people
rethinking their financial portfolios. But hey, at least they’re
better off than Steak & Ale. Watch “What If The US Paid Off Its
Debt” for an unlikely hypothetical, or check out this video instead!
