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Message: Can Countries Really Go Bankrupt!!!

Can Countries Really Go Bankrupt!!!

posted on Feb 01, 2009 11:48AM

By SPIEGEL Staff http://www.spiegel.de/international/...

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.

Great Britain is on the brink of financial ruin.

And so far, national governments have gone very far. Be it in the United States or in Europe, the sums governments are having to cough up to prevent the financial system from collapse are staggering.

Germany alone has already provided credit guarantees of €42 billion ($52.28 billion) to prevent the collapse of Munich's Hypo Real Estate, a bottomless pit that most now believe will have to be fully nationalized. The only thing holding up such a move is a legal provision in Germany that limits state holdings in banks to 33 percent. Meanwhile, Germany's second-largest consumer bank, Commerzbank, has been bailed out, with the state taking a one-quarter stake in the company. And the recent fourth-quarter loss of €4.8 billion at Germany's leading financial institution, Deutsche Bank, suggests that it too may ultimately require state assistance.

From Inconceivable to Inevitable

The image is even bleaker in the United States, where economist Nouriel Roubini estimates that losses in the financial sector will total $3.6 trillion. In the United Kingdom, the government has partially nationalized the Royal Bank of Scotland and Lloyds TSB -- and many experts see a full nationalization as inevitable.

There are few who would disagree with such moves. Should large systemically-vital banks go bust, the global financial system would collapse. But how much can countries afford to pay before the deficit-spending bubble bursts? An unimaginable scenario? Less than a year ago, a nationalization of banks in the US, Germany and Britain would have been inconceivable. Today, even the US -- the home of unbridled capitalism -- sees these moves as inevitable.

The borrowing being done by countries to finance the bailouts, economic stimulus programs and shortfalls in tax revenues will create a lasting burden. Worse, with the decline in the banking sector continuing, it is unclear that such massive spending will be effective. Especially when other, less economically stable countries surrounding have gone into a tailspin.

Take the example of Great Britain. The country is on the brink of financial ruin. Real estate is overvalued, private households are overly indebted and its vast financial sector has been badly hit by the crisis. Confidence in Britain's ability to overcome the economic turmoil is sinking by the day, as evidenced by the precipitous decline of the pound, which has almost reached parity with the euro. Just 13 months ago, it was worth €1.40.

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