When-Countries-Go-Bankrupt

In December 2006, Britain made its final payment of $84 million on a $4.34 billion loan from the U.S. that was made all the way back in 1945. Germany wasn’t the only country to go bankrupt after WWII. This money allowed Britain to stave off its total collapse after devoting almost all its resources to the war for over half a decade.

To put this in perspective, $4.34 billion in 1945 is roughly equivalent to $140 billion today, an amount that was double the size of Britain’s economy at the time.

Had the U.S. not made this loan, the British economy would have been thrown into a tailspin, causing huge implications, not only to the UK, but also to countries around the world.

Today we see a number of nations on the verge of bankruptcy. But what does this mean for our global economy with heightened awareness of every micro-decision, and fluid capital markets that can react to virtually every whim?

To be sure, many countries have gone bankrupt in the past, and many more will default in the future. So who’s next, and what kind of problems will a nation’s insolvency cause?

What happens when a nation goes bankrupt?

When a country goes bust, the pain is felt on very deep levels. The most basic systems and institutions that people have come to depend on simply disappear. Power companies stop operating, the police stopped working, gas stations close, grocery stores run out of food, postal workers stop delivering mail, retirement checks stopped coming, and banks close their doors with bankers fleeing the country, taking people’s life savings with them.

This is what happened in Argentina in 1999.

Argentine president, Carlos Menem, bought into some of the IMF’s latest thinking about how an unrestrained capitalist market would be the ultimate recipe for success. However, without proper checks and balances, businesses will thrive at the expense of the country, and the general population will suffer.

In Argentina’s case, wealthy people took their money and fled the country. Over $40 billion left the country in one single night. This resulted in a run on the banks, followed by a collapse of the country’s national currency. Argentina’s citizens were so desperate and panicked that many spent nights sleeping in front of the automated teller machines.

In reaction to this, the government froze all bank accounts for one year, only allowing people to withdraw minor amounts of $250 per week.

In December 2001, confrontations between the police and citizens became a common sight, and fires were set on some of the main roads in Buenos Aires. President Fernando de la Rúa declared a state of emergency, which just led to more conflicts and turmoil.

Eventually, the situation became so chaotic that President Fernando de la Rúa fled an enraged mob by helicopter.

Many private companies were also affected by the crisis. Argentine Airlines, as an example, was hit hard, and forced to stop all international flights, on several occasions in 2002. They came close to bankruptcy, but managed to survive.

The unemployment rate soaring to nearly 25%

An estimated 30,000-40,000 of the newly homeless and jobless survived by scavenging the streets for cardboard to eke out a paltry living by selling it to recycling plants.

Many barter networks cropped up to compensate for the widespread shortage of cash, and large numbers of people began to rely on them.

Argentine products were rejected by some countries, for fear they might arrive damaged or in poor condition.

Agriculture was also affected. The USDA put restrictions on Argentine food and drugs arriving at the United States.

Producers of television channels were forced to produce far more reality TV shows because these were so much cheaper to produce. Virtually all education-related TV programs were canceled.

 

Argentina political crisis blows out of control

Argentine people fight back

A 2004 documentary titled “The Take” by Avi Lewis and Naomi Klein does a great job of capturing the people’s movement in Argentina to regain control of their failed country.

“In the wake of Argentina’s dramatic economic collapse in 2001, Latin America’s most prosperous middle class finds itself in a ghost town of abandoned factories and mass unemployment. The Forja auto plant lies dormant until its former employees take action. They’re part of a daring new movement of workers who are occupying bankrupt businesses and creating jobs in the ruins of the failed system.

But Freddy, the president of the new worker’s co-operative, and Lalo, the political powerhouse from the Movement of Recovered Companies, know that their success is far from secure. Like every workplace occupation, they have to run the gauntlet of courts, cops and politicians who can either give their project legal protection or violently evict them from the factory.

The story of the workers’ struggle is set against the dramatic backdrop of a crucial presidential election in Argentina, in which the architect of the economic collapse, Carlos Menem, is the front-runner. His cronies, the former owners, are circling: if he wins, they’ll take back the companies that the movement has worked so hard to revive.

Armed only with slingshots and an abiding faith in shop-floor democracy, the workers face off against the bosses, bankers and a whole system that sees their beloved factories as nothing more than scrap metal for sale.”

In the middle of all the chaos, a few brave souls managed to find a new way to make things work. Desperate time require desperate measures, and the good people of Argentina were indeed desperate.

Lessons from Iceland

Iceland, a tiny country with just under 320,000 residents, was the first domino to fall in the 2008 global financial meltdown, when its banks defaulted on $85 billion.

Iceland was hit harder by the crisis than many other countries because of its inflated banking system. In just five years, the banks went from being almost entirely domestic lenders to major international financial intermediaries.

Unbeknownst to most of the population, the country basically turned itself into a massive hedge fund. The whole nation was caught up in a web of deception.

In a matter of weeks after the banks’ collapse, the unemployment rate jumped to 10 percent, house prices fell, the currency plunged and inflation surged.

But Iceland used a different rulebook than Argentina.

They refused to bail out the banks and jealously guarded, and even expanded, social programs. This may represent a model for other countries facing a similar calamity in the future.

Just over three years after Iceland’s economic implosion, the country is showing strong signs of recovery.

Factoring in a Declining Population

Labor demonstrations are almost a daily occurrence in southern European cities. Demonstrators decry the austerity measures and budget cuts being imposed on them.

However, one of the biggest factors affecting these future economies will be their declining population base. They are sitting on a demographic decline that, if not soon reversed, all but guarantees the continent’s downward slide.

Spain, once one of Europe’s economic superstars, rose to the top largely through real estate speculation and its growing assimilation with the rest of the EU. As little as six years ago, the country was building upwards of 50% as many houses as the U.S. while having 85% less population. Roughly six million immigrants came to work in Spain during the boom times.

Countries like Greece, Italy, Portugal and Spain have not developed strong economies to compensate for their fading demographics. When the real estate bubble broke, there were few industries to step in and fill the gap.

 

Spain’s unemployment rate has climbed to over 23%, more than twice the EU average. Unemployment among those under 25 in both Spain and Greece is now over 50%.

A generation ago Spain was a strongly Catholic country with among the highest birth rates in Europe, with the average woman producing almost four children in 1960 and nearly three as late as 1975-1976.

With an increased number of women in their childbearing years, the population is now higher than it was in 1975, but the number of marriages has declined from 270,000 to 170,000 annually.

Unlike Sweden or Germany, Spain cannot count on immigrants to compensate for their demographic decline. Although 450,000 people, largely from Muslim countries, still arrive annually, over 580,000 Spaniards are leaving for places like northern Europe and Latin America.

At this rate, projections show that the Spanish population will decline from its current 47 million to just over 35 million by 2060.

Their declining population coupled with a growing number of young people leaving and an overall aging population will mean a far higher “dependency rate.” The dependency rate is the number of people working in proportion to the people dependent upon them. Projections show that in Spain, by 2021, there will be six people either retired or in school for every person working.

Yes, it’s counter-intuitive that a declining population base will lead to higher unemployment, but the current financial crisis is upending conventional thinking.

Corporations don’t want to entrust their future to an unstable country with weak finances. So jobs that would have materialized during a good economy have gone elsewhere.

The unemployment rate is a very good indicator of which countries will go bankrupt next.

Final Thoughts

If you think we are past the point of more country’s going bankrupt, think again.

Most national bankruptcies are like Bernie Madoff on steroids. What once seemed like a good investment suddenly turns into a giant ponzi scheme with the working public footing the bill.

The problems become exacerbated when there are fewer people working and many more retired.

The growing crisis in Greece, Spain, Portugal, and Italy are but the tip of a much larger iceberg.

The question then becomes a matter of how the problems are dealt with.

Do they deteriorate into something tantamount to a civil war, like what happened in Argentina? Or can they be handled in a more civil manner like Iceland?

And how do the modern communication systems we have on the Internet factor into this equation?

Social networks like Twitter and Facebook all heighten awareness, and countries close to collapse have already begun to experience a brain drain, with the most wealthy and talented moving to more stable communities.

In today’s fluid environments, people and resources can react instantly to any adversarial conditions. So if taxes go beyond a certain pain threshold, people will simply fold their tent and move elsewhere.

Those left behind will feel trapped, and as a result, will become very angry at the situation. This anger will be channeled towards any person, company, or entity they feel is culpable in the matter. In most cases, this will be banks, financial institutions, and government officials.

With the fester mood ramping up in Europe, and the current attitude toward imposing hardships on the people of a country for the improprieties of a few, this will not end well.

The next chapter in global unrest is about to begin, and for the growing ranks of the unemployed, this will become their new occupation.

By Futurist Thomas Frey

Author of “Communicating with the Future” – the book that changes everything

 

10 Responses to “When Countries Go Bankrupt”

Comments List

  1. <a href='http://spherit.com' rel='external nofollow' class='url'>Spherical Phil</a>

    Well stated Tom! Excellent overview of critical issues that are rarely talked about and ones that will get much worse. And unfortunately for all of us, there is no magic bullet. Iceland's 'solution' created significant problems outside the country. That approach is not the answer for all. The problems are complex, interconnected and self-organizing requiring a new way of looking at them, understanding them and addressing them. But few see and understand the world and countries as complex systems. They still view everything as mechanisms and hence spend their time looking for 'broken parts' to fix. The global system has been structured in an unsustainable way. The situation can be improved, if we want to. And therein lies the question. Are we, you and I, the average person and the powers that be, are we truly willing to do what it takes to create a sustainable society?
    • admin

      Phil, Excellent comments. You're right, the Iceland approach probably created far more problems than it fixed. Countries are indeed very complex systems, and the old checks and balance systems used in the past tend to be a poor fit for the elaborate business dealings being conducted today. As to your last question, I'm pretty sure everyone is far too busy patching the flaws in our current systems rather than to really take a holistic view of the entire problem and start over with the top to bottom overhaul that a sustainable system model would require. Tom
  2. <a href='http://www.linkedin.com/in/jojje' rel='external nofollow' class='url'>George A. Berglund</a>

    Great analysis! I'm thinking of the impact of the reparations inflicted on Germany after WWI. It paved the way for fascism and therefore World War II. It is difficult for a democracy to understand that you should pay for past mistakes. The economy's impact on people's daily lives are now far greater than just a few years ago. I fear for disorder and loss of human life if this is not done right.
  3. Lee Curkendall

    My company had offices in Buenos Aires, Argentina, from 1998 to 2002 and I spent many weeks each year working in that country. I can assure you the reasons for Argentina's decline wasn't "unrestrained capitalism". There were, of course, many outside factors such as the devaluation of the Brazilian currency (a large Argentine trading partner), the Asian Crisis, etc. but as the debt mounted and budgets were cut, people took to the streets. I was (involuntarily) in the middle of some of those riots. Were the people rioting for a smaller, more sustainable, government? Nope. They wanted MORE government assistance! Sound familiar? Capitalists don't flee with their money because of unrestrained capitalism... they flee because corrupt governments are about to destroy the wealth they created.
  4. <a href='http://spherit.com' rel='external nofollow' class='url'>Spherical Phil</a>

    Tom, in response to your response above. Two things. First there is an unstated assumption that taking a 'holistic' view requires a 'top to bottom overhaul' and that this approach is out of necessity traumatic and potentially destructive. This is where the sciences of systems, complexity, chaos and ironically fusion provide a very different perspective. We as individuals, families, communities and countries are already, naturally complex adaptive systems. The problem is the failure to recognize, understand and apply the science of systems to our lives and activities as systems instead of the science of reductionism. This does not have to be something that is traumatic, it is natural, if we will allow it. Systems self-organize into more complex entities based on a very few rules or protocols, it is science. But this is the exact opposite of how society has been structured with countless rules (laws) with the inevitable results that you have so eloquently written about in the American tax code and penal "systems." But, the real question remains and you re-emphasized it. If the current system is not sustainable and everyone is so busy trying to fix the broken parts, of which failure is inevitable taking this approach, what kind of world is being left to our children and grandchildren?
  5. <a href='http://www.engagingchange.com' rel='external nofollow' class='url'>Michael Cushman</a>

    Hi Tom In general, the root cause of a country going bankrupt is corruption. Argentina was mostly about corruption. Most of the African countries going bankrupt in the 70s and 80s were caused by corruption (plenty of that money for roads and schools ended up in Swiss bank accounts or buying guns). Greece fraudulently qualified for the EU by cooking its books with the help of hidden loans from a major US bank (who planned the deceit). In the US, high risk mortgage loans were chopped up and hidden among sound loans and then the entire instrument was misrepresented as low risk. The buyers often were European banks, who then got caught holding a bag full of crap. Sometimes the corruption is "legal" but clearly corrupt to common sense. In the US, "investment banks" were created to function like real banks. Raise your hand if you don't see a problem with using stocks as assets to cover cash reserves. The US legislative system is corrupt because each committee member who is suppose to regulate and protect the system receives millions in campaign funds from financial institutions. It's legal, but there's no integrity when the industry is pumping cash into the pockets of the police. Sometimes there are bubbles, and as you point out. Often real estate is the current bubble of choice. This won't bring down a country if the banks hold adequate reserves and maintain a balanced portfolio. Canada has no issues because it maintained a more conservative banking system, for example. You make an interesting point regarding declining populations and shifting demographics. These are new challenges for many countries. I'm sure some will do well, others will struggle. I haven't seen any data to show that declining populations causes bankruptcy, however. Some countries with high population growth go bankrupt, while some slow growth countries have high standards of living. With different education levels, natural resources, infrastructure, automation and exports, an economy's success or failure is far more complicated than just population. Basically, bankruptcy of a country is the fault of it's government. Either it is corrupt, or it is lax in its responsibilities to oversee the soundness of its banking system. Right?
    • admin

      Michael, Some very good points here. I was reluctant to write about this topic because its far more complicated than can adequately be covered in a short synopses like this. As to your last point, though, its probably not as simple as just "blame the government." With all of today's new and unusual "moving parts," it may not be reasonable to expect government officials to be aware of everything. Yes, it may be attributed to incompetence, but at what point does getting blindsided by something new go beyond the boundary of reasonable governance. I'm pretty sure this will be happening far more often in the future, even without corruption. Tom
  6. Dan McCarty

    Great article...thanks for sharing. I don't think a Greek bankruptcy will hurt Greece as much as people think. As with a corporate bankruptcy, the people hurt the most will be the debtors....the banks which loaned Greece money and will have to use up any bad debt reserves to cover defaults, with more countries with problems looming on the horizon. The main worry Greece has is hyper-inflation due to devaluation of their new/old currency vs. the Euro. If I were Greece, I would exit.
  7. <a href='http://www.ExpertMediaCoach.com' rel='external nofollow' class='url'>Neal Browne</a>

    Obviously, denial is perilous policy. These countries, including the U.S., should have seen it coming long before, but nobody wanted to be the one pulling the reality rope connected to the alarm bell. And everyone wants to be re-elected, not labeled an extremist. Whether it was truly believed or not, the rhetoric was, "don't worry, it will all work itself out"-- much like Thelma and Louise enjoying the last few seconds of manufactured glory before they went over the cliff. Same fate--a very hard landing ahead. More effort seems directed at the blame game than toward solutions that will truly work in a world-wide economy. The best answer would have come ten years ago, but since it didn't, and since the intense complexity has exponentially increased, simple solutions are fantasy. I like to be optimistic, but with the figures that are all too real, coupled with the rampant mix of rage and self-righteous protest attitude, I think the snow has turned to dry asphalt on this sled ride.
  8. <a href='http://www.pixelclique.net/author/jackwinston25.html' rel='external nofollow' class='url'>Jack Winston</a>

    Only Ireland has a significant increase in employment after a year. I think they are using the funds of their government from the bank, government offices and taxes.

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