DEALING WITH DEADBEATS.(the need for national bankruptcy protection, similar to corporate protection)(Brief Article)

The 7-Eleven Corporation and the sovereign state of Argentina have a couple of things in common. Both appreciate the benefits of late-night dining. And both are well acquainted with the adverse effects of suffocating debt. 7-Eleven gained that valuable experience in the nineteen-eighties, when it was losing a billion dollars a year and had creditors banging on its doors. Argentina went through it a decade later, when a slowing economy, an overvalued currency, and government mismanagement left the country unable to keep up with payments on the hundred and forty-one billion dollars that it owed to foreign lenders.

There was, however, one key difference between 7-Eleven and Argentina. A company can save itself by declaring bankruptcy; a country cannot. When 7-Eleven could no longer pay its bills, its parent company declared Chapter 11, which protected 7-Eleven's assets, put debt payments on hold, and gave it enough breathing room to put together a restructuring plan that persuaded creditors to give the Slurpee another chance. Argentina wasn't so lucky. When it couldn't meet its payments, it simply defaulted on its debt, effectively cutting itself off from the world's capital markets. The economy collapsed, leaving nearly a quarter of the workforce unemployed, and food riots led the government to declare a state of siege.

7-Eleven was allowed to stay in business because Americans have come to see the virtues of bankruptcy--of giving an indebted company a chance to turn itself around. No one gets exactly what he wants from Chapter 11--creditors get a haircut, employees get laid off, and shareholders (usually) get zilch--but it is generally preferable to selling off a company's assets piece by piece. With struggling nations, though, we've historically taken a more Draconian approach. In 1876, when Egypt was struggling to pay down its debt, the British and the French took over the country's finances and diverted more than half its revenue to service the debt. In 1902, in Venezuela, British, Italian, and German warships blockaded ports and shelled towns because Venezuela refused to pay the money it owed them. Creditors have lightened up since then, but the governing principle when a country owes a lot of money hasn't changed much: no pain, no gain--or, rather, pain and no gain.

Unfortunately, the brass-knuckles approach seldom works, for creditors or debtors. The Latin-American debt crisis of the early eighties wreaked havoc on countries and banks alike; more recently, the global economy suffered a series of meltdowns caused by debt-laden countries' desperate schemes to meet their obligations. Once a country starts to sink under the weight of debt, it rarely comes up with a reasonable solution to its problems. More often, as in Argentina, the battle to stay afloat makes things worse. Consequently, the ...