US Government Debt Different - Finance Department - University of ...

Donald S. BernsteinAmendment, simply default on its debts without making a defaultremedy available to its creditors.241Even though, however, we are unlikely to find a bankruptcy silverbullet to help restructure the debts of the United States, experiencefrom corporate bankruptcies and reorganizations can teach us much.Bankruptcy accomplishes two fundamental things for a distressedcompany. First, it helps the company restore its profitability by givingit breathing space and helping it eliminate costs (through, amongother things, discontinuing unprofitable operations, rejecting executorycontracts and leases, and eliminating interest expense). Second,through the discharge of claims, it permits the company to right-sizeits debt load so it fits the company’s income generating capacity. Thecosts and debts eliminated in a typical bankruptcy reorganizationinclude not only those arising out of debt for borrowed money butalso day-to-day operating payables and long term payment commitments.From a financial point of view, operating payables and longterm commitments are just other forms of debt, and if they are abovethe level that can be sustained by the company over time, they haveto be reduced for the company to survive.To successfully restructure, the cost of the company’s financial survivalmust be spread among the company’s stakeholders, includingshareholders, lenders, suppliers, current employees and retirees. Ourbankruptcy laws and the parties’ relative non-bankruptcy entitlementsset the parameters for the allocation of costs among the relevantparties.Financially strapped sovereigns, like business enterprises, must spreadthe cost of their restructuring among their relevant stakeholders toachieve sustainability. The stakeholders are, of course, somewhat differentfrom those in a private enterprise. In addition to the holdersof the sovereign’s debt, the stakeholders include the users of governmentservices (the public), the beneficiaries of government support(such as social security and medicare recipients) and taxpayers. Increasingtaxes, reducing services, and reducing debt and long termcommitments are the devices available to the sovereign to achievesustainability. However, in the case of sovereigns, there is no bank-