An individual, business, or country that is unable to repay debts and thus declared as insolvent. All of the debtor's assets are used to repay a debt, and the leftovers are distributed among the shareholders. The bankruptcy process can be done in a form of liquidation, which brings to an end the affairs of a business that doesn’t make sense any more, or reorganisation when it is estimated that business can produce more value if it’s kept running. There are 'voluntary bankruptcy' called upon itself by a debtor, and 'involuntary bankruptcy' which is forced on court orders on behalf of creditors. The main goals of a bankruptcy are to enable fair settlement of the creditors’ legal claims and to give the debtor a chance for new start.
National bankruptcy is the formal declaration of a government not to repudiate its debts. It is usually followed by devaluation of the currency, default on domestic debt, and moratorium on payment to foreign creditors. The international negotiations, which take place on that occasion, often end in a partial debt cancellation or debt restructuring. The consequences for citizens are devaluation of their monetary wealth and high unemployment.
0 Euro issued by 0 Euro Bank, created by artist Michael Aschauer
(c) Michael Aschauer
To avoid dispute between EU member states, the original Euro-banknote series doesn’t feature real buildings or people, but fictitious buildings representing important styles of European history. The Zero Euro design leaves the front side empty and sets Turkey’s half moon into that void. Its back side depicts real bridge, modelled after the ’Bridge of Liberty’ in Novi Sad, Serbia as it looked like after being bombed by NATO in 1999.
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An examples in the HISTORY -> The sovereign debt crisis
England was the first European country which declared bankruptcy in 1340. The fiscal pressure was caused by The King Edward III, i.e., his war campaigns and high-priced alliances with the German princes. The king took a loan from Italian creditors in order to finance the invasion to France which led to Hundred Years' War. In 1341, the regency council, discontent with the mounting national debt, forced Edward to accept strict limitations on his finances in return for a grant of taxation.
Spain faced national bankruptcy thirteen times. During the regency of Philip II, Spain got bankrupt four times in 1557, 1560, 1575 and 1596. Inherited state debt, made by Charles I of Spain, was about 36 million ducats and an annual deficit of 1 million ducats. On the grounds of gold and silver from the New World, Charles I of Spain took enormous loan from the Fuggers banking family in order to run election for Holy Roman Emperor. The King Philip II further indebted Spain because of the wars and overseas expeditions which sometimes used up 90% of the state budget. Chronic bankruptcies of Spain brought chaos into the German banking and ended the domination of the Fuggers on European financial market.
Between 1500 and 1800, France was dragged into eight state bankruptcies. Frequent financial crisis caused immense cost to the French people. The outlays outpaced income and brought regressive tax system upon the lower classes. In 1805, France almost got bankrupt again due to the wild speculations with Spanish silver reserves in Mexico done by French trading consortium.
After losing the War of the Fifth Coalition against France in 1809, Austrian Empire had to pay war reparations equivalent to 85 million francs which caused state bankruptcy. Prior to the war, Austrian finance minister warned that the treasury would run out of money during 1809 if they continue to support large Austrian army that had been mobilised for the Third Coalition. Despite the warnings, the Imperial Government decided to wage war against France and lost. In 1812, Austrian Empire took new loan in order to fight Napoleon, and got bankrupt again.
Ottoman government declared bankruptcy in October 1875. Overall financial collapse was triggered by a long period of drought and famine in Anatolia which caused agricultural shortages and decline of wool and silk export. The Imperial Treasury was drained by gigantic and expensive Ottoman administration, wars in the Balkans, and widespread poverty of peasants who were not able to pay high taxes.
Greece got bankrupt at the end of XIX century due to the fluctuation in a prices of dried grapes, i.e., the main Greek export article at that time. The disease ruined French vineyards and the price of grapes went up. After the recovery of vineyards and introduction of special custom taxes in France, the price dropped down disastrously.
Mexico had declared bankruptcy eight times. Last time it happened in 1982 when repayment of $80 billion foreign debt became disputable. Mexico suffered effects of recession in US, who was the buyer of 65% of their exports. The financial collapse emerged due to the decline in prices of major Mexican exports which caused big budget deficit (34% of its revenues came from borrowing), high projected inflation rate of 60%, shortfalls in dollar reserves, and finally continued capital flight. The financial speculators looted the country by withdrawing $50 billion from the economy (the Mexican Gross national product in 1981 was $120 billion).
On 17 August 1998, Russia went through its fifth bankruptcy called "Ruble crisis." The chronic fiscal deficit was plugged by internal loans with very high interest rates. But the bonds issued for the amount of $13,5 billion couldn’t be redeemed. The crises was caused by declines in price of crude oil and nonferrous metals, an artificially high fixed exchange rate of the ruble, the economic cost of the war in Chechnya, declining productivity and high debts of Russian industry, and continued debts on wages. By 1 August 1998, $12.5 billion was owed to Russian workers. In mid-August, $4.8 billion lent to Russia by the IMF to support a number of major banks went missing. Russian oligarchs made a fortune during the "Ruble crisis."
The biggest state bankruptcy was declared by Argentina in 2002. The financial system collapsed due to the foreign debt of $100 billion dollars, caused by debt crisis and overrated value of peso in comparison to dollar. Between June 2001 and June 2002, Argentina’s gross domestic product (GDP) dropped by 13.5%, with a record decline of 16.3% till the end of the year. For the six months devalued peso lost 300% of its value against the dollar. As the result of Argentine economic crisis (1999–2002) the creditors had to agree to the renunciation of up to 75% of the outstanding debts.
In 2010-11, the sovereign debt crises of Greece, Portugal, Italy, Ireland and Spain, brought a fear that Eurozone will collapse. Rising government deficits and debt levels, due to the massive bank bailouts and public sector deficit, resulted in downgrading of countries’ credit ratings and caused crisis of confidence in financial markets. In 2010, Greek public debt (equalled to 115% of their GDP) reached 328.6 billion Euro. The debt rating was decreased to a 'junk' status by Standard & Poor's, who estimated that investors would recover only 30–50% of their money in a case of Greek default. Possible break up of Euro will cause the banking crisis that could not be controlled by the financial authorities. Members of the Eurozone established The European Financial Stability Facility in order to fight crisis and provide help to Eurozone states in financial difficulty. The subject of contentious debate is an introduction of Euro Bond that would allow the members of the Eurozone to refinance their debt on reasonable terms. In meanwhile, the speculators have waged bets against the European currency.
REF 1 -> “National bankruptcy”, Weekly magazine NIN, No 3163, Published: August 11, 2011;
REF 2 -> “You Need This Dirty Word, Euro Bonds”, SPIEGEL interview with George Soros, Published: August 15, 2011; http://www.spiegel.de
REF 3 -> “Cuts to Debt Rating Stir Anxiety in Europe” by Jack Ewing and Jack Healy, The New York Times, Published: April 27, 2010; http://www.nytimes.com
REF 4 -> “Argentina: life after bankruptcy” by Clara Auge, Le Monde diplomatique, Published: September, 2002; http://mondediplo.com
REF 5 -> “Corruption Watch: Tracking Down IMF Billions” by Roman Kupchinsky, Radio Free Europe, Published: June 27, 2002; http://www.rferl.org
REF 6 -> “Gold and Silver: Spain And The New World” by Richard Cowen, Geology 115 course at UC Davis, Published: April, 1999; http://mygeologypage.ucdavis.edu