Where have the bankruptcies of yesteryear gone?

Adam Smith said it: governments never pay back their debts. Owing to the industrialisation, modernisation, and globalisation of economies, the private sector has also joined the public sector in rarely paying back its debts. Throughout the history of governments – and history itself – defaulting on payment was a sort of smaller common denominator which consecrated an undeniable fact: an ever larger proportion of debts will not be settled.

Admitting that all debts are in fact not equivalent and that not all must systematically be paid back instills in the heart of the economic process a distinction that is favourable to growth, a sort of virtuous dynamic. The acknowledgement of these nuances among debts comes to define the role of every creditor, as well as his or her capacity to nourish or harm economic activity. The taboos must now be toppled because debt restructuring reduces the financial burden of an economy. In other words, it is vital to write off debts during a recession since their very presence condemns the economy to further sink into the doldrums. The presence of debts causes an unsteady economy to spiral out of control, often ending in the absolute nightmare that is deflation.

The result of this intellectual movement, which goes back millennia and regularly imposes on creditors the erasure of all or part of their debtors’ obligations, is that laws on bankruptcy have now been established and preserve the dignity of the bankrupt party, and payment default is no longer punished with imprisonment. The intent of these laws is to allow the debtor to start over again with a clean bill of health.

However, for the last decade or so we have seen the reversal of this tendency, with the creditor rekindling his almighty power, but at the risk of destroying the economy. What is austerity then, other than the most flagrant manifestation of these creditors’ demands to be reimbursed? At the price of private and public sectors being forced to bleed themselves even more in order to honour their commitments? How, though, can these creditors be made aware that their intransigence is making a fatal turn against them since the economic slowdown – indeed the recession -, brought on by the bursting of these debts, is reducing the revenue of private and public sectors’ which find themselves in an ever weaker position to pay back their debts.

The fact remains that the financialisation of economies has strengthened the grip of creditors who have won in economic power and even more so in political power. We have therefore, since 2008, been seeing the reversal of a secular – indeed ancient – tendency where bankruptcy was an integral part of economic life, where it was the logical result of crashes, and in some sort the last stage of the economic cycle.