Tuesday, February 03, 2009

Can countries really go bankrupt?

"Can countries really go bankrupt?".

That's the question Der Speigel is asking in an article that examines the lengths national governments are going to in order to try and "prevent the financial system from collapse".

Here's more from the Speigel Online article:

"The bailout packages aimed at shoring up financial markets in Europe are getting increasingly expensive. A creeping depreciation of currency is inevitable and state bankruptcies can no longer be ruled out. Could the euro zone also fall victim to the global financial crisis?

"There's a rumor going around that states cannot go bankrupt," German Chancellor Angela Merkel said recently at a private bank event in Frankfurt. "This rumor is not true."

Of course she's right. Countries can go bankrupt if they allow their deficit spending to spin out of control and are no longer able to service their interest payments. Merkel's comments can be read as a warning that countries need to keep their deficit spending in check. The message is: If governments go too far in trying to bail out companies and the economy, they could face insolvency themselves. "

Well, that last part on the possibility of governments facing insolvency is just common sense, isn't it? Funny how little mention was made of this danger when the whole international bailout bonanza and reliquification frenzy started in earnest last summer and fall.

Anyway, it's nice to get the European view on these events. Note that the article refers to England as "Iceland on the Thames". Just one of those charming little touches you don't get in most of the US mainstream press.

Plus, you'll find lots of commentary here on the finances of European nations, the much talked about "potential collapse of the euro zone", and the history of (nation) state bankruptices.

You better believe this discussion applies to us here in the US as well, given the amount of debt and "stimulus" spending we've taken on lately.

We've talked a bit about sovereign risk and the financial condition of England and other European nations recently. For a quick review of these themes, please see the related articles and posts below.

Related articles and posts:

1. Sovereign risk and UK credit ratings - Finance Trends.

2. Davos: George Soros on the pound, bad bank - Finance Trends.

3. Ron Paul: Cures for our economic disease - Safehaven.