“There’s a rumour going around that states cannot go bankrupt,” German Chancellor Angela Merkel said recently at a private bank event in Frankfurt. “This rumour is not true.”
She is right. States can and sometimes do go bankrupt – and the fear of such an event is clearly haunting many heads of state around the world.
The Italian welfare minister said last December, “There is something worse than recession, and that’s state bankruptcy: an improbable, but nevertheless possible, hypothesis.”
The real question is not whether countries can go bankrupt but who pays the cost associated with a rescue?
When corporations or banks go bust we know that the chief executives escape with their pensions and share options. Staff and workers lose their jobs and pensions and face extreme poverty and destitution.
When states go bankrupt this creates not only economic chaos but also ideological turmoil.
When Argentina defaulted on its debts in 2001, the economy collapsed and the government tried to freeze its citizens’ bank accounts to keep them from converting the local currency into US dollars.
The rich had already salted their money away in dollar accounts in the US and neighbouring countries.
Overnight the idea that as citizens of a country there was a common national interest flew out of the window. The capitalist class and their lackeys had saved their fortunes leaving everyone else, including the middle classes, to suffer the fall out.
The freezing of bank accounts drove whole swathes of the population onto the streets. They forced a series of governments out until they got one which promised not to implement the austerity measures demanded by the International Monetary Fund (IMF).
In Iceland, a dramatic economic collapse led to a virtual insurrection at the start of this year that drove out the centre right government.
Iceland’s currency has collapsed. The banks’ debts are ten times larger than the country’s economy. Iceland’s population has lost most of their savings and face debts and mortgages that can’t be paid off. Unemployment is mushrooming.
But financial help from the IMF or the European Union (EU) is conditional upon further free market measures which will destroy services and impoverish the population.
In Britain, the right wing press has been howling over projections that public debt could reach £1.5 trillion.
The right oppose using state money under any circumstances – except for wars and law and order.
But we should be worried for different reasons. Chancellor Alistair Darling has made it clear the costs of bailing out the bankers will be recouped from us in the form of tax increases and public spending cuts.
Britain is not alone in Europe in facing a massive increase in its debts.
There are huge cracks beginning to appear in the EU, the world’s biggest economic bloc.
In eastern Europe the economies of Estonia, Latvia and Lithuania seem set to contract by over 10 percent. Hungary, Ukraine and Latvia have already needed IMF rescue programmes at the close of last year.
They come, as usual, with draconian austerity measures. Last month, the Austrian vice-chancellor warned that the IMF “rescue” of Ukraine was not enough, and economic or political trouble in Ukraine could create “a domino effect inside the EU”.
But it’s not just eastern Europe that is in trouble. The financial press is concerned about the PIGS – meaning Portugal, Italy, Greece and Spain (Ireland has now been added to the list), where public debt threatens to increase beyond the size of their economies.
Greece’s public debt currently stands at 95 percent of GDP, and is growing. The “solution” demanded by the European Central Bank is to effectively scrap the country’s pension and social security systems. Plans are being drawn up in case these countries are forced to quit the euro currency zone.
Greece’s government wants the EU to offer financial help to avert this happening, but cash is in short supply and a German government may in turn refuse to meet the costs of rescuing weaker economies.
That puts the very future of the euro at stake.
Italian governments have traditionally responded to economic crises by devaluing the currency to reduce costs of exports and increase the cost of imports.
It can no longer do that as a member of the euro.
Italian prime minister Silvio Berlusconi’s key coalition partner is the racist Northern League which wants to quit the EU. It wants a “national” solution to the crisis and devaluation could be part of that.
But any devaluation means quitting the euro. This will result in those who have lent money to Italy’s government either wanting their debts repaid immediately, or demanding massive interest repayments because Italy would be deemed a bad risk.
States, like individuals, are assessed for their credit-worthiness, and countries such as Latvia have effectively been declared “un-credit worthy”.
This is not limited to so called developing countries. Credit rating agency Moody’s recently said the top-grade ratings of Britain and the US were “being tested” by the global economic downturn.
If Britain’s rating slips, creditors could rush to recoup their money. That could tip the economy into a deeper recession.
Governments are increasingly worried that the recession will bring more social upheaval.
We have seen what that might look like with the rioting in Greece at the end of last year or the strikes and protests Ireland in recent weeks.
We have also seen in Hungary and Italy how the same anger can be directed against migrants and others, such as the Roma gypsies.
States can and do go bankrupt. Working people are made to pay the cost if they are prepared to put up with it.
How the left responds to the economic crisis can make a big difference in the oncoming months.