Icelands president said his country could face “national bankruptcy” because of the credit crisis. Can a country actually go bankrupt?
Countries can’t go bankrupt in the same way that companies do – closing their doors, sending everyone home, and having their remaining assets seized. But they can become insolvent if they default on their loans and don’t repay the interest or principal.This has happened many times over the years, particularly among small developing nations. But in those cases the creditors were not able to seize assets – that would have meant an invasion and takeover of the country. In most cases, world bodies such as the International Monetary Fund work to reschedule or restructure debt so that creditors get some of their money back eventually. At the depths of Latin American debt crisis in 1990, more than four dozen countries were close to bankruptcy because they were unable to pay what they owed. Some were brought back from the brink by the creation of “Brady bonds” – a repackaging of defaulted loans that were backed by U.S. collateral.
