Responses to this month's column devolved into a debate about the division of responsibility among institutions faced with the potential for a national bankruptcy. The majority argued that such bankruptcies shouldn't be permitted, largely because of immense social costs. Other remedies sought could include aid from one country to another, the sale of national assets, and the deferral of commitments to allow time for a work out. A sizeable minority, however, took the view that lenders, because they helped contribute to a potential bankruptcy, should suffer the consequences. The question this raises is which lenders, nations or commercial institutions?
Shann Turnbull, citing some of his own work on the subject, argued that the risks of allowing insolvency "can no longer be reliably managed because they have become too complex …(in part because) individuals who know about the risks are no longer connected to individuals who possess the incentive, power and capability to take action and manage the risks." Stephen Basikoti agreed, noting that "creditors have already shown themselves incapable of making better decisions by propping up a system that has led to the situation that must be rectified." Kapil Kumar Sopory cited his concern that insolvency would further exacerbate inequality, expressing the fear that "This is going to lead to revolutions in the long run." Tom Dolembo added, "Dissolving a currency and national identity dissolves the social contract between people and government." Phil Clark commented that "Those who go bankrupt lose sight of personal principle and beliefs. A country going bankrupt undermines itself and demonstrates its weakness." Guarav Goel, while arguing against allowing any country to seek bankruptcy, nevertheless suggested that the situation might require forcing lenders to "absorb the losses," suggesting a fine line between formal and de facto bankruptcy.
Sudheer Thaakur was among those suggesting that national bankruptcy might well be preferable to other rescue measures, commenting that "the pain should be borne … by greedy and equally irresponsible lenders." JTG, while agreeing, didn't quite see it that way, suggesting that citizens as well as lenders share responsibility. In his words: "… can we say that the people are not responsible for the nation's debt? … they are the ones who chose the representatives."
As an alternative to insolvency, forgiveness of debt combined with other measures had appeal for several respondents. Yadeed Lobo, while entertaining the idea of bankruptcy, suggested that debt forgiveness might be preferable. If it involved a developed economy, "That would (suggest) a new type of fourth world country, a developed economy which just turned into a developing one."
Should world financial policy essentially reflect a philosophy of "let the lender beware"? Should nations as lenders bear the greatest share of burden, possibly because of their responsibility for and interest in longer term solutions than commercial lenders? Who, other than a nation's citizens, should bear the burden of a national insolvency? What do you think?
These are especially interesting times. For example, debt seems to be on the mind of a lot of people. That's ironic at a time when, as one CEO recently told me, "There is a sale on money." (One company with which I am familiar acted on that belief recently by borrowing a billion dollars that it didn't need and giving it to shareholders in the form of a stock buyback.) The US government and other borrowers are beneficiaries of this phenomenon, at least for the moment.
My favorite barber, an immigrant from Greece with a love for his adopted country that more than matches his devotion to the country of his origin, tells me his friends and relatives in Greece lead better lives than they can afford. Their wages are high, their benefits even higher, and their taxes are low (because, he claims, they avoid paying them). Banks in other countries have to finance Greek lifestyles. It's a form of wealth redistribution across borders as long as the hammer of bankruptcy doesn't fall on the country.
The phenomenon doesn't only apply to Greece. One recently published study of debt around the world highlights the challenge. Its authors conclude that government debt may become unsustainable over the next 25 years if there are no changes in current tax rates or government benefit programs in retirement and health care—a big "if". Stating that net debt (financial liabilities minus financial assets) levels of 200 percent of gross domestic product are unsustainable, the authors project that, given current policies, the US will experience ratios ranging from 155 percent to 302 percent in 2035, depending on assumptions regarding growth. Euro zone nations, where some action already has been taken, would experience lower ratios. Emerging economies would experience the lowest ratios of all. Among developed economies, only Japan would approach the ratios of the US. Even assuming that all such long-term projections are never accurate, is it possible that a country could fall into bankruptcy?
What does national bankruptcy mean? Years ago economists told us that the national debt in the United States was not important because we owed it to ourselves. If it became worthless, those holding the debt—presumably the banks and most wealthy among us—would lose out to those who benefitted from the deficits causing the failure. Of course, others now own nearly half of US debt and could be in a position to impose onerous penalties on the country and its economy.
But how enlightening would it be for a country like Greece—small enough to serve as a kind of laboratory for the rest of us—to fail? I assume it would be a Chapter 11 bankruptcy, a workout, as we say in US law. Quite likely, lenders would be left in control of the workout. Would Euro zone agencies and lawmakers, acting on behalf of lending banks, have to take drastic action to force Greece's government to impose new laws and collect the taxes? This would be a blow to democracy, but would it be a good lesson in fiscal responsibility for the rest of the world? Is this what it would take to bring us to our fiscal senses? Is it time for a national bankruptcy? Or would a restructuring of the Greek debt (a smaller redistribution of wealth) without imposing bankruptcy be a better solution? What do you think?
To Read More:
Joseph E. Gagnon assisted by Marc Hinterschweiger, The Global Outlook for Government Debt Over the Next 25 Years: Implications for the Economy and Public Policy (Washington, D. C.: Peterson Institute for International Economics, 2011)
See also Gretchen Morgenson, U.S. Has Binged. Soon It'll Be Time To Pay the Tab, The New York Times, May 29, 2011, pp. BU1 and BU7, for an interesting commentary on the Gagnon and Hinterschweiger study.