National bankruptcy occurs when a government is unable to pay its creditors, and may result in partial or no payments. The IMF oversees bankruptcy proceedings and can intervene to prevent them. Debt can be domestic or external, and bankruptcy may result from rising costs, insufficient budgets, or changes in government decisions. The IMF provides policy advice and funding to members facing economic impediments. National bankruptcy usually results in devaluation of private citizen wealth and lower government spending.
Severe economic crises can lead to one or several governments declaring national bankruptcy. This is a formal assertion that the government is not solvent enough to pay its creditors. Bankruptcy may allow the government to pay some or none of its debts to reorganize finances. The International Monetary Fund (IMF) often oversees government bankruptcy proceedings and can intervene to prevent these events from happening. Historical instances of national bankruptcy have been shown to reduce private citizen wealth and constrain government spending.
When a country declares national bankruptcy, the government has determined that it does not have enough cash to pay balances owed to creditors. Depending on the circumstances, bankruptcy allows partial or no payments. The accumulation of such debts can be owned by any level of government, including local or central. Since most governments draw their revenue from citizens, this debt is often perceived as indirectly owed by taxpayers.
A public finance system generally provides the government with money to spend on the budget. A government does not lend money in the traditional sense, such as from a bank or other lending institution. Instead, debt can be issued in the form of bills, bills and bonds purchased by citizens. This money is usually paid back with interest to attract buyers. This borrowing method can be considered domestic debt, which is money owed to creditors within a nation.
On the other hand, external debt is owed to foreign creditors. Similar to the way bonds or notes can be issued to citizens, governments will likely issue bonds and bills payable to other countries with interest. Countries deemed less creditworthy may need to offer substantial interest rates before other countries take on the debt. Government spending can also be financed by taxes such as those generated by citizen income, property, and the sale of goods.
While a government can put a cap on its fiscal spending, debt can pile up year after year due to rising costs or insufficient budgets. National bankruptcy is therefore often the result of any one or combination of the following scenarios: national insolvency because of massive increases in public debt or declines in employment that reduce tax revenue; change in government decisions, such as that of the Russian Empire after the Soviet government took power in 1917; and the decline of a nation in terms of power and wealth, such as that which occurred in Japan immediately after World War II. In each of these events, there is usually a financial crisis that leaves the country without sufficient funds to pay off debts.
The Bank for International Settlements promotes tax standards and banking practices at an international level. This institute also maintains debt compensation standards for government agencies. Unlike corporate entities, however, which can be forced to stop doing business in the event of bankruptcy, governments generally continue to provide services to citizens. Complex national bankruptcy procedures are therefore governed by the IMF, a separate body.
The IMF maintains a membership base from over 180 countries. One of its designated roles is to provide policy advice and funding to members facing economic impediments. The IMF also maintains economic and financial vigilance to ensure that the global market functions properly. When national bankruptcy is perceived as a possibility, the IMF can step in with loans that help pay creditors and set up new spending procedures.
A historic incidence of government credit default occurred with Philip II of Spain. Between 1557 and 1596 he declared national bankruptcy four times. President Roosevelt also declared the United States bankrupt in 1933. At that time, he enacted a national emergency law, whereby no US citizen could legally own gold. Such instances of national bankruptcy usually result in devaluation of private citizen wealth, less public spending, and lower government spending until economic stability returns.
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