The wealth of nations

When individuals have too much debt and can no longer pay their obligations, the law allows them to go bankrupt, essentially giving them a clean slate. It’s not a free pass, and you can’t do it often, but it’s a chance for people to start anew, and a much more humane solution than debtors’ prisons.

St_Briavels_Castle_Debtors_PrisonAmong businesses, bankruptcy is something to be avoided, but it’s not necessarily the kiss of death. Sbarro Pizza went bankrupt in 2011, for example, and AMR, parent of American Airlines, went bankrupt in 2009. Heck, the Chicago Cubs went bankrupt in 2009, and they’re still playing lovably lousy baseball.

But the law isn’t clear about what happens when nations go bankrupt. Argentina has gone bankrupt at least twice in living memory, and the courts are still fighting out how to handle its defaulted bonds.  Greece, which has now defaulted on its debt, is now facing what could be a very long workout to its debt problems.

The Germans, who are the main antagonists in this particular Greek tragedy, maintain that the Greeks are feckless, and must tighten their belts, repay their debts, and generally straighten up and fly right. The Greeks say that they might be better off walking away from the euro (and their debts) and letting investors take their losses.

There’s no denying that the Greeks have indeed been feckless, with a bloated government bureaucracy and lax tax collection. But the Germans have a few things to remember as well — foremost among which is that much of its World War II debts were forgiven in 1952. Why is that? Economist Thomas Pikkety told the German newspaper Zeit:

When I hear the Germans say that they maintain a very moral stance about debt and strongly believe that debts must be repaid, then I think: what a huge joke! Germany is the country that has never repaid its debts. It has no standing to lecture other nations.

… Germany is really the single best example of a country that, throughout its history, has never repaid its external debt. Neither after the First nor the Second World War. However, it has frequently made other nations pay up, such as after the Franco-Prussian War of 1870, when it demanded massive reparations from France and indeed received them. The French state suffered for decades under this debt. The history of public debt is full of irony. It rarely follows our ideas of order and justice.

And, in fact, nations rarely repay their debts — particularly those incurred because of war. While outright defaults are rare, countries typically do one of the following:

* Restructure. The British issued bonds to pay their World War I debt in 1927. Unlike ordinary bonds, however, these can only be repaid when Parliament says so. The UK government announced late last year that it would redeem the bonds early in 2015. So far, no bill has been introduced to Parliament to do so. The 1952 London agreement forgave about 50% of German debt.

* Inflate. Inflation has one big advantage: If you’re a government, you can repay old debts with much cheaper money. The Germans, while suffering from hyperinflation, inflated away a portion of their World War I debt. The Greeks don’t have their own currency, so they don’t have that option.

* Defer. Most governments simply roll over their debts, rather than repay them. Aside from not having to repay principal, rolling over debt has the further advantage of repaying with further inflation-eroded currency.

And just as the Greeks have been feckless, the German (and French, and American) lenders have been reckless. Lenders extended credit to Greece even though they knew it was a weak economy because it was part of the Eurozone. The penalty for reckless lending is taking losses.

Bankruptcy laws evolved because of the cruelty of the alternatives. Debtors’ prisons were vile places: In some prisons, the prisoners lived on scraps dropped from the sidewalks above. Instead, the notion of bankruptcy — a second chance — became law throughout developed countries.

Germany has benefited from that principal. In fact, the London Agreement stipulated that Germany only owed reparations when it was running a trade surplus, and payments were limited to 3% of export earnings. Greece certainly needs to reform some of its profligate ways. Germany should take note of its own past and extend the same generosity to Greece that it got from the rest of the world.




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