The term “BANKRUPTCY” originated in seventeenth-century Renaissance Italy, a period marked by significant scientific, artistic, and cultural achievements. During this time, there was a tradition of smashing a money changer’s bench if they defaulted on a payment. The story goes that when a money lender in Northern Italy became insolvent, their trading bench would be broken. The word “bankruptcy” is derived from the Italian phrase “bancarotta,” which literally means “broken bench.”
In 1776, Adam Smith wrote: “When it becomes necessary for a State to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor.”
The Memorandum of Understanding with the Official Creditor Committee, along with the final agreements with the Export-Import Bank of China and the Ad Hoc Private Bondholder’s group on debt treatments, is expected to be concluded on Wednesday, the 26th. Bankruptcy is legally defined as the inability to pay one’s debts. The Cambridge Dictionary defines it as: “Unable to pay what you owe, and having had control of your financial matters given, by a law Court, to a person who sells your property to pay your debts.” According to the Economic Times, bankruptcy occurs “when an organization is unable to honor its financial obligations or make payments to its creditors, it files for bankruptcy.”
“Sri Lanka’s economy is showing tentative signs of improvement, in part due to the implementation of critical policy actions. But the economic recovery remains challenging,” said IMF Deputy Managing Director Kenji Okamura after concluding a visit to Sri Lanka, where he met with the country’s top leaders and officials.Okamura said he welcomed Sri Lankan authorities’ “strong commitment to implement their ambitious economic program, which is supported by the IMF.”
Over the past four years, Sri Lanka’s economy has faced significant setbacks, causing considerable hardship for its people. Currently, the nation is on the path to recovery from bankruptcy. Following this recovery, concerted efforts will be made to provide employment opportunities for unemployed youth. History was made last week when Sri Lanka emerged from bankruptcy after striking a debt restructuring deal with external creditors and sovereign bondholders. Sri Lanka’s foreign debt exceeds 51 billion Dollars, with $28 billion due for repayment by 2027. President Wickremasinghe initiated negotiations with creditors to achieve this debt restructuring.
“Now, more than ever, it is essential to continue the reform momentum under strong ownership by both the authorities and the Sri Lankan people,” Okamura,D/MDsaid in a statement early Friday, “The current economic crisis has its genesis in policy missteps intensified by external shocks. We discussed the importance of fiscal procedures, in particular income measures, for a return to macroeconomic immovability. I was encouraged by the authorities’ commitment to negotiate a debt policy in a timely and transparent way. Continued open dialogue with the creditors will help to reach restructuring agreements to restore debt sustainability in line with the programme targets.”
Sri Lanka will announce its freedom from bankruptcy status on Thursday. This follows the declaration of a pre-emptive default on April 12, 2022, when the country deferred external debt repayments due to having only 20 million Dollars in gross official reserves.
In 2010, Greece warned of its possible bankruptcy; in 2009, Latvia essentially faced bankruptcy; and in 2008, Iceland declared its inability to pay its debts. However, insolvent countries are not a new phenomenon. Historically, there have been many defaults on external debt. The medieval history of state insolvencies is marked by wars, kings, and ruined Italian bankers. For example, France evaded on its sovereign debt eight times between 1500 and 1800, while Spain defaulted thirteen times between 1600 and 1900.
In the nineteenth century, most insolvencies involved defaults on international bond issues. Belligerents defaulted after World War I, and the Great Depression of the 1930s brought debt crises and further defaults. During this period, the British and French governments defaulted, prioritising the needs of their people over their legal responsibilities to creditors. In the 1980s, most developing countries defaulted, followed by the collapse of the Asian market in 1998, which later led to a crisis in Russia. These global crises prompted debates and proposals for a worldwide bankruptcy regime as a substitute to IMF bailouts. It is significant that the idea of applying bankruptcy principles to autonomous states is not new and dates back to earlier times.
Ecuador holds the record for declaring bankruptcy the most times among independent nations, having done so ten times. Other countries that have declared bankruptcy multiple times include Mexico, Costa Rica, Brazil, Spain, Uruguay, Chile, and Russia. In 2008, Iceland declared bankruptcy with a debt of 85 billion dollars following the crash in the US financial sector. The banking system’s debt was equal to ten times Iceland’s GDP. Since then, Iceland has made a solid recovery from the disaster.
Widespread corruption left Argentina bankrupt in 2001 with a debt of 145 billion dollars. The policy of pegging its currency, the Peso, to the US Dollar, combined with out-of-control public debt, rendered the country unable to withstand numerous economic shocks. By 2001, with unemployment reaching 20%, Argentina declared the biggest default in history, with its debt exceeding 100 billion dollars. InMarch 2020, Lebanon defaulted on its massive debt, which at the time was about 170% of GDP [$90 billion] —one of the highest debt-to-GDP ratios in the world. By June 2021, the currency had lost nearly 90% of its value. The World Bank declared the crisis as one of the worst the world in over 140 years.
Back to Sirikotha
Internal squabbling has disintegrated the SJB. Chairman FM Fonseka accuses the leader and deputy leader of corruption, while seniors like Rajitha, Athukorala, and Mannapperuma lead a group of about 17 members who are poised to cross over. If they are so fragmented now, one can only imagine their dysfunction in government when faced with pressing issues. They will likely collapse at the first challenge, dragging the country back into bankruptcy. The SJB has only one alternative: return to Mahagedara–Sirikotha.
Sajith Premadasa appears increasingly disconnected. Despite inheriting strong oratory skills, his attempts to seek consensus and peace within and outside his party for economic recovery are viewed as unrealistic. This approach parallels the tendencies seen in the Rajapaksas, who prioritise short-term achievements over long-term stability.He should aim to develop the country in collaboration with the President. Only Ranil Wickremasinghe can steer the country out of its present challenges, focusing on genuine solutions instead of attention-seeking theatrics and pointless diversions. The President has confirmed his candidacy, and even some of his political opponents openly acknowledge that no other leader matches his political experience, expertise, and global influence.
This shift might not only attract a significant portion of undecided voters but also potentially steer the party back to Sirikotha and align it more closely with the UNP. Such a move could alleviate the burden that the UNP and Wickremasinghe currently carry, distancing themselves from the out of favor Rajapaksas and SLPP.
