Remember: A Country Is Not a Company

Remember: A Country Is Not a Company author Webmaster1 On: 03/25/2013 Views: 24

The UK's Chancellor of the Exchequer commended his budget to the House of Commons last week to help create a country that "wants to be prosperous, solvent and free." Discussing Greece, Germany's Angela Merkel said "The top priority is to avoid an uncontrolled insolvency, because that wouldn't just hit Greece, and the danger that it hits everyone, or at least a number of other countries, is very big"

Marc Chandler of Brown Brothers Harriman wrote recently "the less solvent you are, the more sovereignty you have to give up." In recent years Iceland, Ireland, Greece, Portugal, Spain, Italy, and Cyprus have flirted with national insolvency, been termed 'insolvent' by the markets, and many have had to relinquish some of their sovereignty as a result.

You are insolvent when you can't pay your debts. Households and firms have struggled with insolvency for centuries. Insolvency is usually a balance sheet concept based around the valuation of assets. When the value of your assets is less than the value of your liabilities, you are insolvent. Usually you work out a repayment schedule with your creditors via a restructuring process.

For countries the notion of national insolvency is a newer, and potentially very misleading, idea. Countries aren't corporations. Technically almost every country would be insolvent if if was asked to pay all of its debt using its available assets. All governments in practice secure their national debts on their abilities to levy taxes. You can't really repossess a country, in fairness. When a sovereign borrows too much, it either pushes the debt into the future by rolling over its debt, or failing that, defaults on some or all of the debt. The history of sovereign debt is in fact the history of sovereign default. Defaults tend to happen, in bursts, about every 30 years or so. But before the current crisis, very little attention was paid to this idea of national insolvency. There are very few mentions of national insolvency during the East Asian crisis of the late 1990s, for example.

In fact national borrowing on the modern scale really only began around the seventeenth century. Before that in the monarchical era, so-called "court bankers" provided cash-strapped sovereigns with loans and quite often served as royal tax collectors and handled other fiduciary matters for them. Monarchical debts, when they were paid, were usually paid at the people's expense. For example the land now known as Pennsylvania was given by the Crown to William Penn to repay a 16,000 pound debt. With the passing of the monarchical governance structure, responsibility for a nation's debt moved from the rulers to the ruled. Henceforth these were the people's debts, issued by a national bank, the Bank of England — in return for the privilege of producing its own banknotes — on behalf of the people, to their elected rulers.

I believe the analogy between national finances and insolvency is damaging. If politicians and policy makers believe their country is, literally, insolvent, then they behave differently towards their creditors. For politicians of debtor states, suddenly vast privatizations make sense, because of course you're selling some of your remaining assets. Suddenly the will of the people of the debtor nation becomes secondary to the will of the nation's creditors. Suddenly democracy is an expensive irrelevance in the face of an overwhelming technocratic desire for a speedy, and market-friendly, solution. There are many examples, but two come easily to mind: Europe's fury in 2011 when then-Prime Minister of Greece George Papandreou threatened to put his country's bailout terms to a referendum, and more recently when the Cypriot parliament refused to pass a law which would levy a deposit tax on ordinary citizens with less than 100,000 euros in the bank. When the deal to bailout Cyprus was finally done, the Financial Times reported markets rising as "the plan does not need approval from the Cypriot parliament." Super.

Creditor countries calling the tune by which debtor countries dance is not a new invention. But using the language of insolvency to do so is new. So when and why did it happen?

The single European currency project, in depriving member states of the ability to issue their own currency, has created the conditions for something close to national insolvency when economies slump. With high debt-to-national output ratios, current account deficits, fiscal deficits, and, putting it mildly, shaky banking systems, the debtor countries of Europe look very much like insolvent firms to the markets. Their sovereign power to issue currency is gone, meaning only painful deflation through the wage channels are possible. Leaving the currency union is very, very costly. The solution is national austerity. Indeed, in some cases, like Cyprus, Ireland, and Italy, the banking systems are so big relative to the rest of the economy as to make the sovereign itself almost vestigial.

The saving of the banking system and the system as a whole is the prime concern of Europe's policy makers — typically representing the interests of creditor countries — but what will take its place? A more or less autocratic system of coercion is the logical outcome of these policies. They come from using ideas like national insolvency to reduce the grip a people have on their sovereignty.

But there is no asset valuation concept in the founding documents of any nation state; nor should there be.





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