“Countries don't go bankrupt”

Former Citibank chairman Walter Wriston is usually cited as the originator of the quip. This is almost certainly wrong; it was considered conventional wisdom in the international financial community at least a decade earlier.

On September 14, 1982, about a month after the Mexican default that signaled the beginning of the 1980s debt crisis Wriston wrote:

If a country undertakes policies that contain a formula for solving its balance-of-payments problems over time, it will find that financing for its investment projects and for any temporary balance-of-payments gap is almost always available; however, if the adjustment policies show no foreseeable long-term solution, financing will not be forthcoming, but the country does not go bankrupt. Bankruptcy is a procedure developed in Western law to forgive the obligations of a person or a company that owes more than it has. Any country, however badly off, will “own” more than it “owes”. The catch is cash flow and the cure is sound programs and time to let them work.

Later, Wriston said:

Unlike a business corporation, a country has almost unlimited assets in its people, its government, its natural resources, its infrastructure, and its national political will.

The above Wriston quotes are from page 293 of Appendix A of the 2003 book Restructuring Sovereign Debt: The Case for Ad Hoc Machinery by Lex Rieffel , which in turn evidently copied the quotes from some current media source.

Another assertion on page 293 is apparently by Rieffel himself.

Every national government has the technical capacity (or ability) to repay all of its external debt. ..................The technical capacity to repay supports the view that sovereign defaults reflect an unwillingness to pay, rather than a inability.

One concludes that, even in 2003, the conventional wisdom that an IMF workout would always be possible, though perhaps painful, still persisted as conventional wisdom!

In 2010, a nation's debt to GDP ratio has become significant, according to conventional wisdom. For example, the IMF's World Economic Outlook of April 2010 contains 13 instances of “debt-to-GDP ratio”. As another example, BIS Working Papers No 300 (March 2010) has 29 instances of “debt/GDP ratio”.

Yet it remains for most of us to (re)learn of, and incorporate:

• the ideas of Melchior Palyi (1892-1970) about marginal productivity of [sovereign] debt made available to us via Antal Fekete. For example the 2010 IMF report cited above does not refer to marginal productivity of debt -- at all. As another example, BIS Working Papers No 300 (March 2010) has only two instances of the word “productivity”. The second does assert that an excessively high debt/GDP ratio will adversely affect “productivity growth”. But it fails to make the leap to the notion that additional debt could actually be causally related to a decrease in productivity.

• the fact that, when marginal productivity of debt is negative, a nation's “people, its government, its natural resources, its infrastructure, and its national political will” are of little use. More debt is making things worse.

• the fact that, through the magic of compound interest, a nation can reach a point where it is impossible to pay the interest on its debt (without an international Zero_Interest_Rate_Policy – itself unsustainable).

By spring 2008, as the Global Financial Crisis was breaking over us, Carmen Reinhart and Kenneth Rogoff were ready to turn “Countries Don't Go Bankrupt” on it's head.

Using their newly-assembled comprehensive dataset, they reported on April 16 in their Panoramic View of Eight Centuries of Financial Crises that “....serial default on external debt—that is, repeated sovereign default—is the norm throughout every region in the world, even including Asia and Europe.”

“Serial default remains the norm, with international waves of defaults typically separated by many years, if not decades.”