Wednesday, March 23, 2011
The rocky downslope Portugal is facing, is no different than Greece or Ireland, nor will Spain be able to avoid the same fate in the near to mid future. In the case of both Greece and Ireland, they've sold their national sovereignty to the banks. Ireland's economy is in a depression and Greece is in a more precarious state.
There used to be a time when a nation defaulted, it meant military invasion to force repayment, usually though the robbing of a nation's natural resources. An example of this was in the 1860s when Mexico defaulted on its debts to France so in 1864, its leader, Napoleon III invaded, toppled the Mexican govt, then put in a puppet leader named Maximillian to rule until he was eventually overthrown by Benito Juarez and the Mexican people, and killed in 1867.
Now in present times, the debtor nation's leaders meet with bank executives and work out a new repayment plan. It is true that when a nation defaults, it effectively can not borrow for years, and then when eventually able, it will do so at high interest rates. But overall, it is not the nation or its populace that takes the hard hit in a default-- its the creditors and bond holders.
So it is the creditor and bond holder who gets hurt most in a default. Currently as nations near default do everything humanly possible to avoid it, it is the populace of those nations who get hurt with the poorest feeling the most dramatic and sustained affects. Meanwhile, creditors and bond holders, continue receiving 100 cents on the dollar in repayment on debts.
So, why do nations like Greece and Ireland sell their national souls instead of default?
As mentioned earlier, its very hard to get loans and the interest rates will be higher than what they're paying now. In addition, neither nation has a robust, self-sustaining economy. Ireland is almost 100% dependent on imports and its exports are very minimal in comparison. The same holds true with Greece- both are heavily dependent on trade.
After the default, for four years, Argentina was a pariah, effectively shut out of the international financial markets. Even as the economic situation improved, thanks in part to its resources and exporting capabilities, the amount of the debt was still the largest defaulted debt in history (about $93bill USD), and Argentina was in no position to pay without sacrificing essential parts of its budget. The government was eventually able to force the creditors to take stiff 'haircuts' on their debts by remaining strong in the face of global banking threats. Banks eventually started re-lending to Argentina in 2010.
A national default is no different than a personal bankruptcy-- life is certainly more difficult in the near-term but there's a certain point when debts simply can't be repaid without incredible financial hardships that can lead to nations politically and socially fracturing. And in the long term, with sound leadership (if there is such a thing), the economic health and vitality of the nation (like that of the individual) improves.