Can California declare bankruptcy? What about Greece?

Answers to your questions about the news.
March 8 2010 5:01 PM

Can California Declare Bankruptcy?

What about Greece?

Arnold Schwarzenegger. Click image to expand.
Gov. Arnold Schwarzenegger

California passed a gas tax last week to help make up for its nearly $20 billion budget gap, the latest in a series of measures to right the state's teetering economy. The country of Greece is in even worse shape, with accumulated debt higher than 110 percent of GDP, set to reach 125 percent this year. Can a state declare bankruptcy? Can a country?

No and no. Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn't include states. (The statute defines "municipality" as a "political subdivision or public agency or instrumentality of a State"—that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11th Amendment, which means they can't be sued. In other words, they don't need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum.

Advertisement

Say the state can't make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state's debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors' committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state's budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)

Greece is in a slightly different situation. There's no international bankruptcy court for countries that can't pay their debts. Instead, other EU countries that depend on Greece's solvency, such as Germany or France, would have to agree to bail it out. (When the economy of one member of the Eurozone sinks, it drags the euro down across the continent.) In return for loans, Greece would agree to implement austerity measures, such as hiking the price of gas, freezing government salaries, and raising the retirement age, to steer the country toward solvency. Whichever countries bail out Greece may not get their money back. But at the very least, Greece wouldn't pull the European economy down with it. Another option would be a bailout funded by the International Monetary Fund or the World Bank, which have stepped in when the economies of Ecuador, Russia, and numerous African countries have tanked. But their leaders seem reluctant. Worst-case scenario, the EU could expel Greece—Greece's deficit is already four times higher than what the EU allows. But that could hurt the euro as well by signaling to investors that the EU is unstable and thus a risky bet.

Got a question about today's news? Ask the Explainer.

Explainer thanks Kenneth Klee of UCLA Law, Alexander Laughlin of Wiley Rein LLP, and John Pottow of the University of Michigan Law School.

Become a fan of  Slate  and the  Explainer  on Facebook. Follow us on  Twitter.

TODAY IN SLATE

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Weigel
Sept. 20 2014 11:13 AM -30-
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Behold
Sept. 21 2014 11:00 AM Sometimes You Just Need to Print Your Photos the Old-Fashioned Way 
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 21 2014 8:00 AM An Astronaut’s Guided Video Tour of Earth
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.