Bankruptcy is a financial situation in which someone is unable to repay their outstanding debts. Individuals go bankrupt, businesses go bankrupt, but one fact that you might not know is that countries can also go bankrupt.

When individuals and businesses go bankrupt, their assets are measured and evaluated, after which the said assets are used to repay the outstanding debts. Bankruptcy allows individuals and businesses to have a “fresh” start by forgiving debts and giving creditors a sense of debt repayments.

Default dominos bankrupt countries

However, when countries go bankrupt, the dynamics are different from individual and business bankruptcy. To start with, when a country losses the ability to pay its creditors (or refuses to pay its creditors) the country is said to be in “Default” instead of being in bankruptcy.

The move away from the gold standard made it possible for governments to manufacture money out of thin air and the economy of the world has never remained the same ever since. This piece seeks to explore how countries are becoming increasingly bankrupt to central banks because of their fiscal irresponsibility.

Sovereign defaults harm taxpayers

In recent times, some countries have been into default while others have had close shaves with bankruptcy. Cyprus almost had a default in 2013 and it took the timely approval of a 10B Euro bailout deal to save the country from descending into chaos. Ireland was also a hairbreadth away from a default until an 85B euro bailout was arranged for the country. Portugal, Spain, and Greece are the most recent examples of how indiscriminate borrowing of money by central banks can put serious strain on the economy.

When countries default on their debt obligations, their assets cannot be seized to pay off debts in the same way the assets of an individual or a business can be sold. The commonest solution to sovereign defaults is a debt restructuring process that gives the creditor hope that they’ll get their money back. The restructuring usually involves an extension of the due date of the debt as well as a change in the interest rates on the debt.

However, sovereign debt restructuring tends to hurt the citizens, taxpayers, and holders of government debt more than it hurts the central banks that got the loans or the vultures that gave out the loans. For instance, after Argentina had its $81B default in 2001, it offered creditors a third of what it owed them – the best case scenario had 93% of the debt was eventually swapped for performing securities in 2005 and 2010.

When a country defaults, the central banks can also devalue the nation’s currency in order to make it more affordable. However, the devaluation hurts the savers and others who have kept their faith the fiat monetary system. Devaluation of a country’s currency provided a great entry point to profit from Forex trades. Banc De Binary provides a platform to stay on top of events in the global forex markets in order to make smart moves as countries continue to run themselves around with bad debts. After a sovereign default, a country will also most likely enter a period of austerity with the sole aim of jumpstarting growth in the economy.

There’s nothing new under the sun

Fiscal irresponsibility on the part of governments is not a new event because history is littered with stories of governments that over-borrowed against their treasuries. Spanish 16th-century king, Phillip II took Spain into bankruptcy (default) four times during his reign. Greece has gone to default seven times in the last 200 years and Argentina has been in a default eight times in the last 200 years. The Economist notes that most countries have defaulted once in their history.

Going forward, countries will continue to take on debts that cannot easily repay because it is easier to borrow money than to take fiscal responsible measures to economic growth. Creditors will also continuing lending money to countries (even weak countries) because they know that they are covered. They know that the loan will be restructured in the worst-case scenario. Irresponsible borrowing on the part of governments will continue to put pressure on the economies of countries.