Multiple forms of aid are often required to revive bankrupt national economies.
As the financial collapses that occurred in Iceland in 2008 and Greece in 2010 showed, bankruptcy is not exclusive to individual people. Lack of access to credit and capital are just two of the more obvious consequences when nations go bankrupt. The price of digging out can be that creditor nations often insist that debtor nations remake their entire economic systems almost overnight. This can strain and spark resentment among foreign partners who have seen their investments go up in smoke.
Lack of Credit
Losing access to credit is one major outcome of a country's bankruptcy. A prominent example came in 2002, when Argentina's economy could no longer absorb its mounting debt. As companies closed and joblessness soared, Argentines pulled money out of bank accounts and stock markets. These actions only deepened the downward spiral, making financial institutions unwilling to lend more money to bail out the country's economy.
Devalued Investments
Taxpayers are often required to pick up the tab for lost investments.
Overseas investments are a prominent casualty of bankrupt economies. The Icelandic banking system's collapse highlighted this problem. To finance aggressive acquisition of foreign firms, Icelandic bankers overextended themselves by borrowing heavily. About $1.7 billion in British and Welsh investments alone vanished, leaving taxpayers to make up the shortfall, "Business Week" reported in October 2008. An angry British government threatened lawsuits to recoup its losses.
Domino Effect
An increased use of bankruptcy petitions often triggers a "domino effect," according to a report from the European Centre for Monitoring Change. As bankruptcies ripple through a supply chain, firms caught at the end are driven into insolvency. This phenomenon is seen in related industries--such as in Lithuania, whose national airline's closure was party blamed for a round of hotel and restaurant bankruptcies.
Political Turmoil
Political turmoil is another lasting consequence. When Greece's economy collapsed in spring 2010, its European Union partners demanded a crackdown against soaring budget deficits and a pension system that allowed state workers to retire at age 50, or even sooner. Though polls showed most Greeks favoring such reforms, state labor unions planned to call strikes in protest, the "Washington Post" reported.
Strained Relationships
Traditional trading relationships are often dramatically redefined in a bankruptcy.
Strained relationships are all but inevitable when the creditors holding a bankrupt nation's debts feel misled. The implosion of Iceland's economy aroused strong feelings in Britain, whose government froze $6.8 billion of its neighbor's assets. Spurning International Monetary Fund assistance, Iceland sought Russian loans to stabilize its currency, the krona. If Iceland's European neighbors seemed reluctant to help, "one has to look for new friends," Prime Minister Geir Haarde told "Business Week."
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