When Democracies attack

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Alarmist? Could be.

Icelanders are expected to deliver a resounding “no” vote in a referendum Saturday on a $5.3-billion (U.S.) deal to compensate Britain and the Netherlands for deposits lost when Iceland's banks collapsed at the height of the global financial crisis.

Locals largely view that deal both as bullying by bigger nations and an unfair result of their own government's failure to curtail the excessive spending of a handful of bank executives that led the country into its current malaise.

Iceland braces for public backlash - The Globe and Mail

I don't mean to imply that Iceland, Britan and Norway are going to get to fisticuffs to settle this over due debt but it does bring up larger concerns, and the overall political quagmire, of what happens as the US debt comes due and the Japanese (now the largest holders of US debt), the Chinese, the South Koreans, and the Saudis try to collect from the government.

The US democracy was broadly 'in favour' of the debt creation. They did not vote out governments who overspent by issuing debt and they voted for costly wars.

Will the US public vote to pay off 'thier' debts?

If they do not and push comes to shove there stands to be one democratic country that feels it does not need to honour debts, even to other democracies.

How are the constituents of other democracies, not to mention some of the more authoritarian counties, going to react to a nation that chooses not to honour thier debt?

Extending this even further, what happens if the citizens of two democratic nations vote, in free and fair elections, to go to war?

It isn't completely inconsivable that one country votes not to pay debts the public doesn't feel they were part of while the citizens of a second nation that is due money vote to respond with hostility.

 

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A good example which draws comparisons between the situation in Greece, where riot police have been joining the protestors (bastile anyone?), and the situation in US States. As above, I'd suggest using more examples of financial problems to view the situation down south. Iceland is a good modern example but plenty of other case studies exist which could be used to better predict the way that the US population will react as the leadership attempts to navigate out of the crisis.

As protesters and strikers took to the streets of Athens this week demonstrating against cutbacks aimed at stemming the Greek debt crisis, questions were being asked in the US about whether similar financial stress could erupt in states there.

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Last week, new research showed that states also face a gap of at least $1,000bn for pension and healthcare pledges to state workers

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With warnings from states from New York to California that they are running out of cash or suspending bill payments, it is logical to ask whether they will default – the same question that Greece is facing

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Instead, concerns are focused on debt from cities, counties, hospitals and land development authorities which have less reliable revenues than the taxing power of a state

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Recent talk about a potential bankruptcy filing for Pennsylvania’s capital city Harrisburg, also has stoked investors’ concerns, particularly about debt at levels down from the states.

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BlackRock says that if state and local governments were to make the cuts necessary to balance their budgets it would mean significant job losses.

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“It will be an uneven recovery pattern,” says Robin Prunty, a public finance analyst at S&P. “We expect those states that are slower to recover to possibly look to borrowing.”

FT.com / Capital Markets - US states struggle in the shadow of Greece

I don't even want to think about what might happen to a hospital that defaults on its bonds.

Yeah public health care.