Ha Joon Chang Is Right!

Yes, we should indeed have a form of sovereign bankruptcy:

Unfortunately, no mechanism like this exists for countries, which is what has made sovereign debt crises so difficult to manage. Because they don\’t have any legal protection from creditors in times of trouble, countries typically postpone the necessary restructuring of their economies by piling on more debts in the (usually unfulfilled) hope that the situation will somehow resolve itself. This makes the debt problem bigger than necessary.

What\’s more, because they cannot officially go bankrupt, countries face a stark choice. Either they default and risk exclusion in the international financial market (although countries can overcome it quickly, as Russia and Malaysia did in the late 1990s) or they have to opt for a de facto default, in which they pretend that they have not defaulted by making full repayments on their existing loans with money borrowed from public bodies, like the International Monetary Fund and the EU, while trying to negotiate debt restructuring.

Better by far to be able to declare, yup, we\’re broke, now, what do we do about it.

Except, except, there\’s one glaring problem here:

All national bankruptcy laws allow companies with too big a debt problem to declare themselves bankrupt. Once bankruptcy is declared, the debtor company and its creditors are forced to work together to reorganise the company\’s affairs, under clear rules.

First, a standstill is imposed on debt repayments – for as long as six months in the case of the debtor-friendly American bankruptcy law. Second, subject to the majority (or in some countries a super-majority of two thirds) of them agreeing, creditors are required to accept a debt reduction programme in return for a new company management strategy.

\”New company management strategy\” in nation state terms is \”the government will stop fucking up like it has been\”. Or, if you prefer, a sovereign bankruptcy would insist that the nation state is no longer sovereign.

Which is fine by me. The people who get fucked over when governments go on the rampage are the citizenry. Turfing out the rampagers as a condition of aiding the citizenry sounds like a good idea to me. Except, ofcourse, it\’s colonialism, a denial of democracy and, erm, national sovereignty.

And there isn\’t actually a way around this little point. If for example, Argentina declared bankruptcy then Christina would, necessarily, be out on her ear and the electors be damned.

19 comments on “Ha Joon Chang Is Right!

  1. You’re missing another rather important point: when companies or people go bankrupt, they’ve got zero or negative assets. Countries, even when technically bankrupt, have enormous assets – their land. Greece could trivially clear its debts by selling off some of those lovely islands to the nice Germans. And the islands would then have competent government. Though the islands would probably have to start paying their taxes.

  2. Ahem. Countries don’t need legal protection from creditors. As Stalin might have said, “How many divisions does Goldman Sachs have?”

    Any country can default any time it likes. Unlike a company, nobody can force them to go to court, confiscate their assets, etc. Because they’re a country, and actually sovereign.

    The problem is that they want to go bankrupt and keep borrowing more money. Isn’t it?

  3. You’re missing another rather important point: when companies or people go bankrupt, they’ve got zero or negative assets.

    This isn’t true at all: usually companies go bankrupt due to liquidity or cashflow problems, while often sitting atop enormously valuable assets. Take Glasgow Rangers FC, for example. They were declared bankrupt despite sitting on an asset – their football stadium – which is worth millions.

  4. So when the IMF et al. lend to a bust government they don’t put in arrangements that the government would not have implemented itself? So they don’t insist that a particular Prime Minister resigns or that particular spending cuts or reforms are not implemented?

    Really?

  5. What IanB said. Countries already have full legal protection from bondholders, because there is no international law to force payment of sovereign debt.

    It’s true that a company can be declared insolvent while its net assets are positive. But it seldom happens. In Glasgow Rangers’ case, I very much doubt that the value of its ground is anywhere near what it owes, even after winning its tax case. And I’d be surprised if the ground weren’t already being used as security for its debts.

  6. Two things.

    First, when a comany goes bankrupt the creditors take the hit. When a country goes bankrupt the entire financial system gets wiped out.

    Second, it does illustrate that national sovereignty is not an absolute thing. No nation has ever successfully abolished the law of gravity, and they will also never abolish the financial laws of gravity – that over a long enough period of time production will equal or exceed consumption. If the government can’t control its spending eventually the creditors or inflation will. If your government is bankrupt and the choice is between fascism and anarchy that is because the voters have unrealistic expecations of that consumption/production equation.

  7. over a long enough period of time production will equal or exceed consumption

    What? Did you genuinely mean to type this, or is it some kind of inadvertent garbling? If you did, what the heck is it supposed to mean?

  8. I think it means you can’t keep living off borrowings or stored resources – eventually you have to produce as much as you consume? Which seems rational? Obviously, if there are lots of stores or lots of lenders, you can keep living on the never-never for quite some time.

    Obviously, trade allows us to exchange things we produce for other things we want to consume …

  9. Well, I’m not sure, but it looks like some kind of Keynesian woo, since it’s implying a general glut; that is in this strange situation in which production “equals or exceeds consumption”, that’s a bad thing. So I think he’s implying the over-production catastrophe. Or something.

  10. ” Tsipras was asking why most burdens of adjustment for bad loans have to fall on the debtor country and, within them, mostly on its weaker members. And he is right.”

    WTF? The private sector creditors took a direct 50% hit (and a lot of crummy bonds as payment). The direct losses on Greek debt were over a 100 billion euros. So how this cretin thinks that the burden only falls on the debtor is beyond me.

  11. as usual the supercilious stoat – Connolley – totally misses the point. As Ian B says, governments want to defult and yet still have the chance to borrow more money. Will stoat keep funding his friends in Greece and Argentina? Do they have enough assets to pay back the existing loans? Maybe the omniscient stoat knows. It would be amazing if he did since his ignorance is usually astounding.

  12. PaulB – “Countries already have full legal protection from bondholders, because there is no international law to force payment of sovereign debt.”

    Funny that Argentina has just been ordered to pay up by a foreign court. Enforcement may be tough but an Argentinian ship was seized in Africa the other day wasn’t it?

    There are ways of forcing people to pay their debts. Especially for those countries that have large and valuable assets overseas. If I could sue Iran, for instance, I would. They probably have frozen bank accounts from the Shah’s day in the West.

  13. “Ahem. Countries don’t need legal protection from creditors. As Stalin might have said, “How many divisions does Goldman Sachs have?”

    Any country can default any time it likes. Unlike a company, nobody can force them to go to court, confiscate their assets, etc. Because they’re a country, and actually sovereign.”

    Argentina seems to be having a few problems in this regard at the moment, a naval vessel impounded etc. so it’s not quite as clear cut as that.

    Of course, it will be amusing to see the Chinese try to repossess the USS George W H Bush. I suspect that might be a bit more challenging.

  14. PaulB – “Countries already have full legal protection from bondholders, because there is no international law to force payment of sovereign debt.”

    http://online.wsj.com/article/SB10000872396390443749204578051231734377620.html

    Argentine Navy Ship Remains Impounded in Ghana

    By SHANE ROMIG

    BUENOS AIRES—An Argentine Navy cadet-training ship will remain in Ghana after a court in the West African country rejected Argentina’s appeal of an order detaining the vessel in a dispute with creditors.

    Argentina argued the three-masted sailing ship ARA Libertad sailed to Ghana to perform military functions and United Nations conventions protect it from seizure.

    Ghana Commercial Court Judge Richard Adjei-Frimpong disagreed with that argument Thursday, saying in his ruling that Ghanaian law doesn’t protect military assets.

    On Oct. 2, the judge ordered the 130-meter long ARA Libertad held at the Port of Tema until Argentina honors U.S. judicial rulings that awarded about $1.6 billion to Elliott Management Corp.’s NML Capital Ltd.

    Argentina’s deputy defense and foreign ministers, Alfredo Forti and Eduardo Zuain, are on their way to West Africa to meet with “the highest authorities of Ghana’s government” to press for the ship’s release, the defense ministry said Thursday.

    The dispute stems from Argentina’s $100 billion sovereign default in 2001. The South American nation managed to restructure about 93% of its defaulted bonds in debt exchanges in 2005 and 2010 that offered investors about 33 cents on the dollar.

    Some $4.5 billion of defaulted bonds are in the hands of so-called holdouts like Kenneth Dart’s EM Ltd. and NML Capital Ltd. funds.

    NML’s attorney in Ghana, Ace Anan Ankomah, said Argentina has the option of depositing $20 million with the court and taking away the ship. The fact that the ship has a crew on board that needs to get home may shape the negotiations going forward, Mr. Ankomah said.

    They get their ship back for a mere $20 million deposit? I wonder they don’t leap at it. Although it sounds a bit much for a Ghanaian judge these days. Even a tenth of that.

  15. Well yes. Countries, whether debtors or not, don’t have protection from other countries taking their stuff if they can get hold of it. But I’d dispute the suggestion that debtor nations are deterred from necessary restructuring by the fear of no longer being able to operate sailing ships in Ghana.

  16. There is some debate on the incentive effects of sovereign banktuptcy in the academic literature. Most of it generally is of the “it might have some negative ex ante effects – because creditors will be less willing to lend – but the positive effects probably would outweigh it.”

    The Argentines played fast and loose by the law and are reaping the whirlwind, perhaps unfairly – Mario Blejer wrote that the legal decision in NY was bad in the FT and he is an excellent former central banker and I dont know enough of the details to contradict him.

  17. Blueeyes: a country only turns to the IMF for a bailout because the country’s government prefers the deal that the IMF offers to what it would have to do itself without the bailout.
    A government is always free to say nope, we’re going to default and fund ourselves entirely through tax receipts, no more borrowing at all. This would typically mean much harsher cuts than the IMF demands.

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