A state cannot go bankrupt, but many countries are close
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By Ritva Liisa Snellman
In addition to the consumers and companies, the international economic crisis is putting pressure on entire nations. Iceland is in a difficult jam. Things are going badly in Hungary, as well as in Ukraine, Greece, Ireland, Estonia, and Lithuania.
In especially bad shape is Latvia.
Prime Minister Valdis Dombrovskis, who took office in Riga in March, has observed many times that unless the tailspin of the economy is brought under control, money will run out, and bankruptcy will loom in June.
If Dombrovskis’s warning comes true, the summer would mark the first bankruptcy clearance sale, in which a presidential palace, house of parliament, a couple of national parks, or possibly even a bit of motorway would be available to buyers at bargain prices.
If an entire country went into bankruptcy, it would mean that bankruptcy lawyers would take over, preventing the president, prime minister, and the government from performing their official duties, and they would start liquidating the common assets.
The prime minister’s warning is seen by Erkki Havansi, Professor of Procedural Law at the University of Helsinki, as a metaphorical use of language, aimed at getting the different sides to understand the seriousness of the situation.
A state cannot apply for bankruptcy, nor can it be forced into bankruptcy in the legal sense.
“I don’t believe that the law of any state would even allow it”, Havansi says.
When Finnish bankruptcy legislation was reformed in 2004, the law specified that in addition to the state, entities that cannot declare bankruptcy include municipalities, federations of municipalities, public utility companies, the Evangelical Lutheran Church and the Orthodox Church, their parishes, parish federations, and the Province of Åland.
For countries on the brink of insolvency there are efforts to design support packages. The International Monetary Fund grants loans to countries in trouble, but the conditions for the loans are stringent. State deficits need to be kept under control, and this is only possible through massive spending cuts.
"The smaller the country, the easier it is to save”, Havansi says. “Latvia is an EU country, and fortunately, a small one. Buttressing a country the size of Poland would be more difficult. It is worth keeping in mind that Argentina was on the verge of collapse about ten years ago, but it was also helped back onto its feet.”
Zimbabwe is a good example of a state whose economy and social system have collapsed completely.
However, technically it is not in bankruptcy, although 80 per cent of its labour force is out of work, and hyperinflation has left the country with an economy based on barter trade.
In the view of Pekka Ahtiala, Professor Emeritus of international economics, much more important than defining bankruptcy is to think what happens to national self-determination when it ends up in a situation in which the IMF controls the country’s monetary policy.
Finland came close to such a situation ion 1990-1991, when Minister of Finance Iiro Viinanen toured the world hat in hand pleading for credit.
The previous time that Finland came close to IMF guardianship was in 1975, when the economic indicators were twice as bad: inflation was 22 per cent, and the current account deficit was 8 per cent of overall production.
The country was suffering from post-oil-crisis economic difficulties, and Ahtiala himself was the economics minister of the caretaker government of Keijo Liinamaa.
“The people from the IMF were visiting, and they said that you will have the right to take out a loan twice, but the third time we will make the rules. The rules were such that a sovereign country could not accept them”, Ahtiala says.
The rules of the game included massive tax increases, spending cuts, and a tight grip on the money supply.
Instead, the government and the Central Organisation of Finnish Trade Unions (SAK) reached a pay agreement that brought inflation under control.
Countries struggling in the present type of situation have few options.
What the IMF says, goes: budgets need to be cut, and state employees’ pay has to be cut.
“When spending has to be reduced, ultimately it is the purses of the pensioners that are visited”, Ahtiala says.
Helsingin Sanomat / First published in print 19.4.2009
RITVA LIISA SNELLMAN / Helsingin Sanomat
ritva.liisa.snellman@hs.fi
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| 21.4.2009 - THIS WEEK |
 A state cannot go bankrupt, but many countries are close |
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