National bankruptcy is a popular discussion topic of late. In light of the global financial meltdown and the runaway deficit spending of the United States in particular, observers are predicting that national bankruptcy is entirely possible. Harvard MBA John T. Reed, for instance, opines that our children and grandchildren will likely “live in a world where America’s credit cards have been cut up because our huge debt was renounced.” Those who insist this could not happen would do well to look at history, and all of the national governments that have gone bankrupt over the years. Today we’ll take a look back at 10 of the best-known examples.
National bankruptcy skeptics like to claim that while countries went bankrupt hundreds of years ago, such catastrophe is out of the question in our modern, inter-dependent world. However, as Spiegel Online insists, national bankruptcy is not “just some theoretical construct.” In their article “The Ghost of Argentina, Spiegel tells the story of Argentina’s bankruptcy in 2001. There was a run on banks following a collapse of the country’s national currency. So desperate and panicked were Argentina’s citizens that “many spent nights sleeping in front of the automated teller machines.” Eventually, the situation became so chaotic that President Fernando de la Rúa fled an enraged mob by helicopter. Despite all the protests and bank runs, the nation simply could not repay its $145 billion in foreign debts.
An even more recent national bankruptcy than Argentina’s 2001 fall from grace was Iceland, which became a casualty of the global financial crisis in 2008. According to BusinessWeek, the cause was a rapidly devalued currency: “the country cannot pay back its external debts, and the Icelandic currency, the krona, has become essentially valueless in the rest of the world.” The upshot of a worthless krona was that Iceland could no longer pay for imports, on which the country is heavily dependent. Worst of all, BusinessWeek notes, is that “with Iceland sitting outside the major currency trading blocs, there may be no one with the incentive or ability to save it.” Despite going hat in hand to the International Monetary Fund and Russia, the UK reportedly threatened to sue Iceland over unreturned money.
Germany has the dubious distinction of having gone bankrupt not once, but twice in recent memory. The first bankruptcy came in the 1920s as a result of losing World War I. The “crushing reparations payments” (reportedly three times the value of all the property in the country) imposed by the Treaty of Versailles reduced Germany to a state of being “completely, hopelessly broke”, according to WebOfDebt.com. Unfortunately, this led to severe hyperinflation of German currency, which eventually got so out of control that “a wheelbarrow full of 100 billion-mark banknotes could not buy a loaf of bread.” The end of World War II produced another bankruptcy in 1945, as most of Germany’s industrial capacity and factories were destroyed by the allies.
Germany was not the only country to go bankrupt after World War II. Following suit, Great Britain demonstrated that even winning a war is accompanied by significant losses. Indeed, a New York Times article reported in 2006 that the UK was only then making its final payment on $4.34 billion in loans extended by the U.S. all the way back in 1945. To put that sum in perspective, $4.34 billion in 1945 is roughly equivalent to $140 billion today, a sum that was “double the size of the British economy at the time.” So ravaged was the British economy following the war that almost all national resources were dedicated to paying war debts for five full years after its completion.
Few developed nations have had economic histories as complicated and challenging as Russia’s. Never was this more apparent than in 1998, when the former communist country suffered a financial crisis unlike any it had experienced prior. This time period was also known as the “ruble crisis” because of the ruble’s central role to Russia’s struggles. Following months of downward pressure on the ruble by currency speculators, Wikipedia states that “Russian stock, bond, and currency markets collapsed as a result of investor fears that the government would devalue the ruble, default on domestic debt, or both” in August 1998. Inflation soared past 80% before the year was out, with many banks closing down and the ruble losing over two thirds of its value from August to September alone. Nor has the crisis been forgotten, with the UK’s Telegraph wondering in November 2008 “will Russia go bankrupt again?”
Russia isn’t the only country that has been dragged into default by a decline in the value of rupees. In 2008, BusinessWeek reported that Pakistan “faced default on its huge foreign debt” amidst the beginnings of the financial crisis late that year. Remarking on the effects of looming default on the country at large, BusinessWeek states that “electricity goes out for as much as 12 hours a day, the gasoline lines get longer, and depositors rush to banks to pull out their meager savings.” Much of this trouble owes to Pakistan’s foreign exchange reserves dropping to $4.3 billion (a 75% free fall over the year prior) primarily because of soaring oil prices, which comprise roughly a third of Pakistani imports. Topping things off, the rupee lost about 25% of its value in 2008 alone.
Zimbabwe offers perhaps the most tragic story of national bankruptcy. In 2008, CNN reported that the embattled African country was “in the midst of an outbreak of cholera, food shortages, hyper inflation, and renewed calls for President Robert Mgabe to step down.” Unable to repay its $4.5 billion debt and struggling with an astounding 80% unemployment, Zimbabwe’s plight eventually worsened to such an appalling degree that one informant told CNN “most areas hadn’t had water for at least a year.” Yale University’s Center For The Study of Globalization reached similar conclusions back in 2005, dubbing Zimbabwe “the world’s fastest shrinking economy.”
Ecuador is another nation unfortunate enough to have gone bankrupt twice in its history. In fact, according to Bloomberg, Ecuador’s announcement that it would default on $30 billion in interest payments was the second such announcement in this decade alone. Addressing the world with defiance and self-righteousness, Ecuadorean President Rafael Correa flatly stated “I have given the order that interest payments not be made. The country is in default.” Arturo Porzecanski, an international finance professor at American University in Washington, spoke for much of the international community (and certainly Ecuador’s creditors) by calling the country a “serial defaulter.” “A lot of other countries have had one or two defaults”, Porzecanski explains, “but Ecuador tops them all.” All told, the South American country has gone bankrupt six times since its 1830 separation from Gran Colombia.
In an article entitled Can European Countries Really Go Bankrupt?, the San Francisco Sentinel uses pre-twentieth century France as an object lesson. As the Sentinel reminds us, “France became insolvent eight times” between 1500 and 1800. While it is tempting to dismiss such long-ago events as irrelevant to modern considerations, we should remember France’s place in the world during those times. Because the United States either did not exist or was still forming from 1500-1800, France (along with England) was one of the world’s foremost superpowers. Indeed, it was largely France’s exorbitant financial support for the American War of Independence that made the country “so deeply in debt as to be effectively bankrupt” in the late 1700′s, according toWikipedia.
The same San Francisco Sentinel piece names Spain as another national familiar with bankruptcy, having defaulted on its financial obligations seven times during the 19th century alone. In fact, Wikipedia reports that Spain was actually the first sovereign nation in history to declare bankruptcy, doing so as far back as 1557. It should be noted that Spanish King Phillip II “had to declare four state bankruptcies” during his time on the throne: 1557, 1560, 1575 and 1596. Such stories are sobering reminders that national bankruptcy is very much real, and has happened repeatedly throughout history to nations that fail to take proper precautions.