Feb 21


BANKRUPTCY – It's not so new for countries after all

Ralph Waldo Emerson famously quoted in one of his 1844 essays "It is said that the world is in a state of bankruptcy, that the world owes the world more than the world can pay, and ought to go into chancery, and be sold." 
With recent happenings, especially in some European countries, the issue of a country being bankrupt has been a constant matter for discussion.  Having recently read the history of the colour red and the importance of collection, ownership and the use of cochineal to the Spanish Empire (and others ), and that Phillip II declared Spain bankrupt four times, we wondered a little more about the history of countries declaring bankruptcy.
One assumes that in ancient times ancient law would have been harsh for a country which could not pay its debts, however this was not necessarily the case.
For an individual in Ancient Greece, bankruptcy did not exist. If a man owed and could not pay, he and his wife, children or servants were forced into "debt slavery" up to a period of five years, until the creditor recouped losses via their physical labour.  Debt slaves had protection of life and limb, which regular slaves did not enjoy. However, servants of the debtor could be retained longer than the designated five years deadline by the creditor and were often forced to serve their new "owner" for a lifetime, usually under significantly harsher conditions.
In the Torah, or Old Testament, every seventh year is decreed as a Sabbatical year where the release of all debts that are owed by members of the community is mandated, but not of "foreigners". However the year following the seventh Sabbatical year (forty-ninth year) is when all debts are released, including those for foreigners.
 In Islamic teaching, according to the Koran, an insolvent person is to be allowed time to  pay off his debt, with the view that if someone is in hardship, postponing payment until the debtor can afford to pay is fair; and if you forgive the debt totally and no-one else knows about it then that is even better for the creditor.
Harsher laws were introduced – by the English in 1542 with the Statute of Bankrupts, and the laws introduced by Genghis Khan contained a provision mandating the death penalty for anyone who became bankrupt three times.
When it comes to the  failure of a nation to meet bond repayments, there have been many countries in this predicament, and not just in recent times. Philip II of Spain declared four state bankruptcies in 1557, 1560, 1575 and 1596.  Whilst the development of international capital markets was relatively limited prior to the 1800s,  according to economic history, there were still numerous defaults by France, Portugal, Prussia, Spain, and some of the Italian city-states. Outside Europe, Egypt, Russia, and Turkey also have histories of chronic default.
When looking at the total defaults by countries, the numbers are not just surprising but disturbing. Portugal has defaulted on its national debt  five times since 1800, Greece five times, Spain no less than seven times (and 13 times in all since 1500).  These countries have continued to exist and develop after their bankruptcies.
By contrast, Anglo-Saxon countries rarely, if ever, default. England has witnessed some close shaves in almost 1,000 years but have never defaulted. The same applies to Canada, Australia and the United States.
So, whilst there are commentators stating that the present economic situation is like no other, history tells us otherwise and shows us that many European countries find bankruptcy culturally acceptable. 

To discuss your financial objectives or investment strategies call Leenane Templeton today on (02) 4926 2300


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