Governments that Can't Pay their Debts

The smooth running of government requires that governments can borrow. There are times when they need to run a deficit to stimulate the economy, they need to finance capital projects, and even if a government's finances are in balance over the year, the collection of taxes may not precisely match expenditure. Governments also often act as guarantors for banks. So governments need to borrow cheaply. They can only do so if they are trusted, so it is extremely serious if a government defaults.

Yet if debts are unsustainable, a default may be unavoidable. Companies that default are usually liquidated, their shareholders dispossessed, and assets sold for the benefit of creditors.

It would be hard to treat a country in the same way, though in the past some countries, such as Egypt in the late nineteenth century, have had their finances managed by nominees of creditor nations. On the other hand we need to impose some penalty to make the repudiation of debts unpalatable to the debtor.

Greek ministers have cited the writing off of much of Germany's debt in 1953. That precedent may be more helpful than many people have realised. By 1953 those who had led Germany to catastrophe had been tried as war criminals, and either executed or imprisoned.

I propose that unsustainable national debt should be forgiven, but only on condition that the politicians who incurred it are treated as criminals.