After Lebanese statement, what does state bankruptcy mean?

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Mon, 04 Apr 2022 - 03:33 GMT

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Mon, 04 Apr 2022 - 03:33 GMT

 U.S. dollar banknotes are pictured at a currency exchange office in Diyarbakir, Turkey, November 17, 2017. REUTERS/Sertac Kayar/File Photo

U.S. dollar banknotes are pictured at a currency exchange office in Diyarbakir, Turkey, November 17, 2017. REUTERS/Sertac Kayar/File Photo

CAIRO - 4 April 2022: Deputy Prime Minister of the Lebanese Government, ٍSaada Al-Shamy announced "the bankruptcy of the state and the Central Bank of Lebanon".
 
He said during a TV interview that the losses would be distributed to the state, the Banque du Liban, banks and depositors, and there is no specific percentage. 
 
“Unfortunately, the state is bankrupt, as is the Bank of Lebanon, and we want to come out with a result, and the loss occurred due to policies for decades, and if we did nothing, the loss would be much greater,” Al-Shamy stated.
 
The statements of Al-shamy raise questions related to the meaning of state’s bankruptcy, and its repercussions. 
 
According to the Corporate Finance Institute, bankruptcy means the government fails to make debt and interest payments when due. Failure to pay debts owed to creditors may be accompanied by an official announcement by the government that it will not pay the outstanding debts, or it may sometimes occur without any official announcement.
 
Reasons behind Bankruptcy
 
State bankruptcy may occur due to change of government, as  when a change in the regime occurs due to a military coup or a revolutionary situation, the new government may question the legitimacy of previous debts taken by the previous government and stop repaying existing debts. 
 
One of the reasons that may cause state bankruptcy is lack of liquidity and this takes place when A country is in default due to lack of liquidity when it is temporarily unable to meet its debt and interest payments because it cannot liquidate its asset base quickly.
 
Moreover, insolvency is one of the reasons behind state bankruptcy because it is a situation in which a country is no longer able to meet its debt obligations, and faces a default.
 
A country may declare bankruptcy for various reasons, including sharp increases in public debt, disruption from austerity measures taken to pay off debts, increased unemployment, and increased government regulations in financial markets.
 
Lebanon is not the only country
 
ِAl-Shamy statements bring back the specter of the difficult memories that Greece experienced during the past decade, which cost it difficult measures to return again to the global economy.
 
 
The great Greek crisis was represented by borrowing, as the value of Athens' sovereign debt rose to the point where it announced that it was close to default, which at the time threatened a major global financial crisis.
 
By the middle of 2010, Greece formally requested the European Union and the International Monetary Fund for urgent assistance to be able to pay the interest and debt installments on time.
 
 
In 2021, Brazil announced its bankruptcy due to the repercussions of the spread of the coronavirus
 
 
Nearly half of the countries of the European continent, 40% of the countries of Africa, and 30% of the countries of Asia declared bankruptcy during the previous two centuries.
 
The United States, Germany, Japan, the United Kingdom, and China were the most prominent countries that declared bankruptcy and failed to pay its internal or external debts during the past two centuries.
 
Germany has suffered from bankruptcy 8 times in two and a half years, thus coming to the forefront of the major economic countries that have been bankrupt, followed by the United States of America 5 times, China and Britain 4 times, and Japan twice.
 
 
In the list of the world's most bankrupt countries, Ecuador tops, which has declared bankruptcy 10 times, after which Brazil, Mexico, Uruguay, Chile, Costa Rica, Spain and Russia have declared bankruptcy 9 times during the past two centuries. In the modern era, Russia declared bankruptcy in the late nineties, and in 2001, Argentina also declared bankruptcy.
 
State Bankruptcy Vs Company Bankruptcy
 
State bankruptcy is not the same as the bankruptcy of investment companies. The international court cannot seize the assets and property of the state to sell them and pay the dues of creditors, as it does with companies, as the state has its own sovereignty and international law does not allow it to be exceeded.
 
Bankruptcy occurs in a country when it is unable to pay its debts, and is unable to meet its other financial obligations such as paying salaries and wages and paying for goods and merchandise
It imports, and in such a situation the state is financially weak, unable to manage economic and social matters.
 
 
One of the most important causes of state bankruptcy is a sharp decline in public revenues, which may lead to a rise in indebtedness, or to a suffocating economic crisis as a result of wrong policies and decisions, or due to losing a war with another country.
 
 
Before the state declares its bankruptcy, it resorts to taking very difficult measures such as increasing taxes, reducing public expenditures and stopping employment in the public sector, and it may resort to friendly countries or international institutions such as the International Monetary Fund (IMF) or the Paris Club to lend it and save it from the difficult financial situation.
 
 
After the state declares bankruptcy, a strong economic shock occurs at the local level, as investors and bond holders rush to withdraw their money from bank accounts and transfer them outside the country, and in order to avoid this, some governments close banks and impose restrictions on the movement of capital.
 
 
On the external level, and as a punishment for default, credit rating agencies issue warnings about investing in the bankrupt country.
 
Debts are settled or restructured between troubled governments and creditors without the presence of international laws regulating this matter.
 
 

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