In the news: Debates on government debt have dominated the media since the onset of the economic crisis following the subprime mortgage crisis. Last week, President François Hollande spoke out once again on the subject of debt, raising the specter of the French government going « bankrupt. » Can a government really go « bankrupt »?
A semantic question
According to the definition proposed by the CNRS here, bankruptcy is » thestate of a trader who has ceased payments and whose cessation of payments has been confirmed by a judgment of the commercial court. » According to this definition, the word bankruptcy is synonymous with « cessation of payments » but only applies to describe a situation faced by a trader (similar to other definitions, such as that in the Larousse dictionary, for example). At first glance, it therefore seems incorrect to talk about « bankruptcy » in relation to a state, although we understand that a state that ceases payments to its creditors could symbolically be described as a « bankrupt state, « as the media often do, without us being able to blame them for it (see the newspaper Le Figaro here, for example, or Le Monde here).
If we now consider the legaldefinition of bankruptcy, it is a « procedure organized by law » following a finding by a court. Often this procedure is a liquidation, where by definition all the assets owned by the entity concerned are sold in order to obtain cash to repay the creditors to whom the entity owes money. Since states set their own laws, it goes without sayingthat bankruptcy in the legal sense of the term has no meaning for a state. Simply put, a state cannot be put into liquidation because no entity is above the state. Similarly, when a company goes bankrupt, it generally disappears and all its assets are sold off. This cannot apply to a state: a state does not disappear because it has ceased payments and decides for itself how to liquidate its assets in accordance with its interests (we will return to this in a future insight).
In short, the word « bankruptcy » is not semantically appropriate for a state, but it is still often used either out of ignorance or symbolically (as a metaphor) to describe a state of insolvency. This is true of both the media and politicians. It would therefore seem a little hasty to criticize President Hollande for using the word « bankruptcy » in this context, as is done in this article in Les Décodeurs here, since the use of this term is common in the media (see here or here) and among politicians (perhaps simply because it is understandable to the majority?). This is true on both the left and the right (see Francois Fillon here, for example). Nevertheless, when it comes to the legal concept of « bankruptcy, » it is clear that this concept cannot be applied to a state and that a state’s cessation of payments does not have the same consequences as a company’s cessation of payments, since the former cannot disappear.
Can a state such as France declare itself « insolvent »? This will be the subject of the next insight (May 19).
Julien Pinter
