What does it mean when a country 'goes bankrupt'?

[Ceefer]

Greece's dire financial situation has been in the news a lot recently.
If the country 'goes bankrupt' what does it mean to the Greek people? Does it mean that public employees won't get paid? I realise it would mean that Greece couldn't pay back the money it has borrowed, but what then? Does the borrowed money get 'written off'?
Have any other countries gone bankrupt in recent years? What about Iceland, what happened there? And Zimbabwe?

Lots of questions here highlighting my total ignorance of world monetary affairs. If anyone can explain these matters in simple terms I would greatly appreciate it.

[Barrichello]

Greece's dire financial situation has been in the news a lot recently.
If the country 'goes bankrupt' what does it mean to the Greek people? Does it mean that public employees won't get paid? I realise it would mean that Greece couldn't pay back the money it has borrowed, but what then? Does the borrowed money get 'written off'?
Have any other countries gone bankrupt in recent years? What about Iceland, what happened there? And Zimbabwe?

Lots of questions here highlighting my total ignorance of world monetary affairs. If anyone can explain these matter in simple terms I would greatly appreciate it.

IMF will step in before a country gets to such an advanced stage. Like what is happening in Greece. Deals are hammered out, and yes public employees will still get paid but new conditions will be applied etc (austerity measures) For example instead of 12 monthly pension payments, Greeks currently get 2 extra "bonus" payments on top, they are looking at suspending this.

Unlike say personal bankruptcy like we have in the UK when as a person you cant just write off what you owe. A country which required aid at some stage will always be held to account. Greece will still pay this money back, it is still a loan that needs to be repaid.

[jim]

Unlike say personal bankruptcy like we have in the UK when as a person you cant just write off what you owe.

I don't know about that... if you're a nation then you can effectively do whatever you want. There's not really any "international law" beyond "my army's bigger than yours". I accept that because they're part of Europe and so on then that changes things, but a nation can write off its debts if it wants to - who's going to stop them? Effectively, the only thing the creditor can do in response is declare war, or these days impose restrictive economic barriers - but if you don't care about either of those, then there's nothing to stop you.

The only example that springs to mind at the moment was when Spain wrote off their debts to the UK in around 1840 because they thought Britain was to blame for their Civil War - I accept that it happened a very long time ago, but it's not hugely different now.

[kalniel]

Yeah they basically don't pay other countries they owe money to, which results in no-one lending them any more money for a while (or at least, only doing so at incredibly high interest rates).

[pp05]

Greece's dire financial situation has been in the news a lot recently.
If the country 'goes bankrupt' what does it mean to the Greek people? Does it mean that public employees won't get paid? I realise it would mean that Greece couldn't pay back the money it has borrowed, but what then? Does the borrowed money get 'written off'?
Have any other countries gone bankrupt in recent years? What about Iceland, what happened there? And Zimbabwe?

Lots of questions here highlighting my total ignorance of world monetary affairs. If anyone can explain these matter in simple terms I would greatly appreciate it.

There is no bankruptcy procedure at international level. At best debt is usually carried forward, or continuosly serviced so that they stay in perpetual slavery.

Worst that happen is their credit rating is lowered and their access to credit dry up or at higher rates.

Most recent examples of default were Argentina. That is to say... they held their hands up and said.. we cannot service this debt 80bn+, feeding our people is more important. This is what the west have always done when the debt got too high. Walk away and start again - It is only way to start again. This is what say the US will do at some point in the future.

This is what African nations should be doing. But despotic leaders are promised a few mercedes and a swiss account if they keep this circus going.

[Barrichello]

Unlike say personal bankruptcy like we have in the UK when as a person you cant just write off what you owe.

whoops that sentence didn't make sense, what i meant to say is "unlike the UK where you can just declare yourself bankrupt and wipe out your debts"

[Barrichello]

Most recent examples of default were Argentina. That is to say... they held their hands up and said.. we cannot service this debt 80bn+, feeding our people is more important. This is what the west have always done when the debt got too high. Walk away and start again

Indeed Argentina was a complete mess. They did go to the IMF to restructure its debt, as they are considered a privileged creditor, and they have paid back about $10 billion to them last i heard.

[shadowmaster]

Ah the IMF, they give with one hand and take with two

[Ceefer]

Where does the IMF get all these mega-billions from?

[shadowmaster]

Where does the IMF get all these mega-billions from?

They are high level loan sharks so a lot of their money is from the very high interests loans they give out.

[pp05]

IMF is the worse case scenario. You do not want the IMF/world bank stepping in at all. I dont know a single country who prospered under the IMF bail out along with their conditions.

But western government /instituitions will do anything than to allow default because it is they who feel it most. So they should!

They have no problem lending in full knowledge the countries cant pay them back. But their very existence is too lend so ethics dont matter.

[Champman99]

Well most national debt is issued in government bond, (sometimes called T-bonds after US Treasury bonds). a £10,000,000 1 year bond might be priced at ~£9,500,000. The government sells a "promise" to repay 10,000,000 after 1 year for the price, the difference being the interest. When the debt "matures" after a year, the government has to pay it off.

So for the UK which still controls its money supply, because the debt is actually issued in pounds, can just "print" pounds to pay it off. Of course you will have rampant inflation and probably wont be able to issue any bonds for ages (noone will trust you, you have paid them back with worthless currency) but it could be better than the alternative, depending what the alternative is.

This is sometimes known as "devaluing" which is a bit misleading as it implies a fixed exchange rate rather than a floating exchange rate, (you might have heard of the devaluation on Black Wednesday, which was slightly different as the government was following a semi-fixed exhcnage rate in the ERM)

Greece does not have that option, because it does not control the supply of euros, and yet its debt will have been issued in euros.

Although I am a fan of the EU in general, the Euro is crazy at the moment. Monetary policy and fiscal policy (taxes and spending) need to be conducted together. You cannot seperate one from the other in my opinion. So there either needs to be more binding fiscal rules, some fiscal unity, or no currency union.

A country going bankrupt is pretty similar to anyone else going bankrupt. The lenders took a risk when they leant you money that you might not be able to repay - if you end up not being able to pay future lenders will not be interested. So effectively I beleive were it to come to bankrupcy you would have a situation where Greece would not be able to raise any money on the markets - this doesnt just mean it would have to operate a balanced budget but also has severe implications for flexibility. Tax revenue may come in in big chunks at the end of the tax year, but public services need to be funded constantly. Even if you are operating a balanced budget you need the facility of borrowing simply to smooth out incomings and outgoings.

I dont really beleive Greece will go bankrupt though, well not officially. (To be honest, its already bankrupt, it cant pay back its next lot of debt each time they mature) Most of its debt seems to be owed to european banks so the other EU governments dont want to see it wiped out.

[Lucio]

I think the best explanation I can give is it's like one giant game of Mornington Crescent.