Debt Repayment and Ceausescu

Arthur Beesley has an interesting article in today’s Irish Times which reports on the views of Nouriel Roubini and Ken Rogoff in relation to Ireland’s debt situation.  One element in the article is a passing reference by  Rogoff to Romania’s determination to pay off its external debt under the Ceausescu regime.

Readers may interested in more details on this case.

Carmen Reinhart and Ken Rogoff write in their acclaimed book This Time is Different (pages 51-52):

In most instances, with enough pain and suffering, a determined debtor country can usually repay foreign creditors. The question most leaders face is where to draw the line. The decision is not always a completely rational one. Romanian dictator Nikolai Ceausescu single-mindedly insisted on repaying, in the span of a few years, the debt of $9 billion owed by his poor nation to foreign banks during the 1980s debt crisis. Romanians were forced to live through cold winters with little or no heat, and factories were forced to cut back because of limited electricity.

Few other modern leaders would have agreed with Ceausescu’s priorities. The Romanian dictator’s actions are especially puzzling given that the country could presumably have renegotiated its debt burden, as most other developing countries eventually succeeded in doing during the crisis of the 1980s.

This summary is taken from the Wikipedia entry on Nicolae Ceausescu:

Ceauşescu’s political independence from the Soviet Union and his protest against the invasion of Czechoslovakia in 1968 drew the interest of Western powers, who briefly believed he was an anti-Soviet maverick and hoped to create a schism in the Warsaw Pact by funding him. Ceauşescu did not realise that the funding was not always favorable. Ceauşescu was able to borrow heavily (more than $13 billion) from the West to finance economic development programs, but these loans ultimately devastated the country’s finances. In an attempt to correct this, Ceauşescu decided to repay Romania’s foreign debts. He organised a referendum and managed to change the constitution, adding a clause that barred Romania from taking foreign loans in the future. The referendum yielded a nearly unanimous “yes” vote. In the 1980s, Ceauşescu ordered the export of much of the country’s agricultural and industrial production in order to repay its debts. The resulting domestic shortages made the everyday life of Romanians a fight for survival as food rationing was introduced and heating, gas and electricity black-outs became the rule. During the 1980s, there was a steady decrease in the living standard, especially the availability and quality of food and general goods in stores. The official explanation was that the country was paying its debts and people accepted the suffering, believing it to be for a short time only and for the ultimate good.

The debt was fully paid in summer 1989, shortly before Ceauşescu was overthrown, but heavy exports continued until the revolution in December.

Although data are patchy for 1980s Romania, an indirect piece of relevant data is that the Romanian current account turned around from a deficit of 5.3 percent of GDP in 1980 to a surplus of 6.5 percent of GDP in 1988.

Exam Question:   Discuss the similarities and differences between the Romanian case and the current Irish situation.

24 replies on “Debt Repayment and Ceausescu”

Brian & Bertie got to go home.

Nic & the missus didn’t make it.

Some megalomaniacs don’t understand finance, resource management, can’t negotiate and have poor listening skills.

Some politicians share all of the above endearing qualities – some say it comes with the job.

An interesting comparison though.

In light of the IMF’s response to the ECB fund it is clear that they realise there is only so much you can adjust fiscally before you enter that downward spiral into a collapse in domestic demand and social dis-integration – see Tunisia, France, Greece etc.

Hopefully we can avoid anything like this and as John Bruton’s letter suggests – let everyone take responsibility where it is due and work together to agree a sustainable recovery and growth.

Quote in article from Dr Roubini.
“If you don’t do it you’re putting on the balance sheet of the sovereign even more of the social cost and the losses of the financial system. Then you are going to break the back of the sovereign and lead to insolvency at the sovereign level. Therefore, we need an orderly restructuring of that unsecured bank debt.”

I particularly like his reference to “unsecured bank debt”. Meanwhile over at NAMA we are paying millions in fees for lawyers, accountant to sift through loan documents to see if the collateral is all in order.
Meantime back the banks “unsecured bank debt” is being repaid on a monthly basis.

Thankfully I have not seen a back being broken in my lifetime. I wonder which part cracks first.

who briefly believed he was an anti-Soviet maverick

I think it is important to remember that he was also a nationalist.

In contrast to other eastern European countries the Romanian Communist party had basically zero popular support in 1945 (whereas in other places like Czechslovakia, Hungary, Yugoslavia and even Italy they had substantial prestige in 1945).

So in 1968 people were happy that he successfully called the USSR’s bluff (in contrast to Czechoslovakia) by butting the army on alert in anticipation of an invasion. He also let people have long hair, maintaining significant popularity until the 1980s.

So one similarity is that Fianna Fáil and Ceausescu were both motivated by ideas of nationalism and trying to avert the national humiliation of a default.

Main difference: there was a lot of non-market activity in Romania. Food shortages were a bigger problem in the cities. In the countryside people grew a lot of their own food.

As a Romanian national, I find the comparison somehow surprising. To say the least. Ceausescu was not motivated by nationalism but by his madness and thirst for power. Romania was a centralized economy, with a secrete police controlling everything and everyone. During the years the debt was paid back, Romania was a sultanistic dictatorship. Ireland is in a difficult economic situation, but has a well established democractic insitutional setting. And this is a big difference. People do have options here. In Romania at that time, they had none.

Adriana, my reading of Rogoff’s remark is that he was simply highlighting the implausibity of supposing that Ireland will pay off the debt in full. Yes, Irish people do have options; in particular, emigration. As taxpayers leave, the burden on those who remain will grow. Eventually the creditors will settle for half a loaf, or some fraction anyway. Rogoff’s point is that it would be better to face the arithmetic now rather than later.

After listening to John McHales comments on Morning Ireland this morning, and his interpretation of Rogoff’s comments one might be inclined to believe he has a bit of the Ceausescu spirit in him.

To be honest I don’t understand their logic or motivation.

What has democracy got to do with debt repayment ?

If the Irish people voted for a party that canvassed on divorce from the central banks control system – the remaining bits of Ireland would be crushed by their remaining vassal states –
The west has run on the model of the limited liability company since elizabethan times which presumed that the world has unlimited resourses – expect people and institutions to start eating each other if they remain on a exponential debt model when there is no more worlds to conquer.

@ Keith Cummeen

The Joint Stock Companies Act 1856 introduced limited liability in Britain. According to Charles Kindleberger (Financial History of Western Europe) , the Swedes got there a few decades earlier, but certainly not in Elizabethan times !

With respect, limited liability has, on the face of it, little to do with limited resources. It’s a vehicle for entrepreneurism and economic development.
No more and no less. It can be used or abused.

I suspect your real target is capitalism, as defined by Fernand Braudel (Civilisation and Capitalism 15-18th c), a global system which prioritises the endless accumulation of capital. It”s all about monopolies, rather than ordinary market relations.

According to Immanuel Wallerstein (World Systems Analysis) , capitalism selectively enriches those who act according to its dynamic. The global TBTF banks are an obvious example. Those who act in other, more socially and ecologically responsible ways, are simply written out of the script.

It follows that your Leeside instincts are sound.

Once again we see the divide in outlook between EU based economists and international/US based ones.
I have still not seen one good reason why we should not negotiate with the IMF alone on this? Really. It is the simple solution to all of this.

@paul quigley:
“The Joint Stock Companies Act 1856 introduced limited liability in Britain. According to Charles Kindleberger (Financial History of Western Europe) , the Swedes got there a few decades earlier ….”

Actually, Ireland got there earlier than Britain, with the Anonymous Partnership Act of 1782:

“The conditions of that act were peremptory. The capital was not to exceed £50,000. The partnership deed must be registered in the name of some one of the shareholders, and who was called the “acting partner,” he alone being subject to the bankrupt laws, all the others being “sleeping partners,” with a liability limited to the amount of their respective shares, but on the express condition that neither directly nor indirectly should they interfere with the management or proceedings of the acting partner.”

(Chas Wye Williams AICE *On Heat, in its relations to Water and Steam; embracing new views of Vaporization, Condensation, and Explosions* 1st ed Longman, Green, Longman & Roberts, London 1860)

Williams set up the City of Dublin Steam Packet Company, and related organisations, under that legislation.


Wouldn’t disagree with Roubini but isn’t it a little late to renegotiate the bank guaranty?
Just default and get on with it. Life won’t end and in a few years the bankers will be back with Red Kwachas instead of Euros.
Some bank that didn’t get burned here will be back to make money from the Irish as so many have in the past.

@Paul Quigley
I was thinking of the East India company in its oringinal manifestation which was perhaps not a formalised limited liability company but more of a Independent company / country with responsibilities towards the entity that gave its charter.
I do have a sneaking regard for the informal full liability companies that were operating on Royal navy ships of the time.
My response to Adriana was motivated by the knowledge that the majority of wealth accrued in the west comes from extracting wealth from other areas.
The fall of the Soviet Union and its minions reduced consumption and the western banks utilised this slack to transfer wealth to the west which drove a tempory wealth effect in the 90s – however no capital was formed – it was transfered to others which consumed it.
In the naughties there was a reaction from elements in the Russian security apparatus which was partially effective in stopping the bleeding , the west received blow back from the locusts it sent out to extract wealth and they came home and did what they always did , although this time they soiled their own nest.
Ireland now is weak and is serving in a small role to redirect consumption towards the Euro core at our expense.
However the present monetory system is unable to accrue capital – the mechanism to save has been corrupted by fiat credit currency and not money – the only way to obtain wealth now is to steal it from others , saving is for chumps in this crazy financial jungle – the Irish Pension pot is a classic case , Ireland would have been best served to redirect its surplus towards a champion electricity provider like it did in the past rather then engage in a capital rundown project applauded by Brussels who wished to see the deindustrialisation of the periphery while sustaining the interest income of the banks that are behind the project.

There is a claim that the oldest limited company is in fact from Sweden and was established in 1288:

The claim is based on a document from 1288, a Wikipedia entry links to a scanned image of this document.

Limited liability companies undoubtedly has its uses, however, as for any other type of company (country?) form it is also true that weak owners risk being taken advantage of by its senior executives. I’d not blame the company form, I’d blame the people elected to monitor the company (country?) for not fulfilling their duties.

Comparing the situation between Ireland & Romania is interesting. One might possibly also add in Russia/USSR & the foreign liabilities incurred by USSR as an option to compare & contrast with the Irish situation.

There’s a risk of confusion here as to whether “paying the debt in full” means reducing debt to zero – which is what Ceausescu set out to do but which to my knowledge noone in Ireland has suggested doing – and servicing existing debts while taking on new ones. I have a lot of respect for Rogoff but the Romanian analogy he drew is overblown.

Limited liability companies are far older than limited liability joint stock banks. These, apparently began only in the 1830’s and were vulnerable to fraudulent structures from the very beginning. They were also creatures of government creation from the very start.

The most egregious were foreign banks that raised debt in Europe to fund US railway development. That system was government supported with free land, but the bankruptcybof the companies and therefore the banks was a drag on activity for a generation. one paper, available on the Internet says that the debt write downs, recapitalizations and defaults resulted in the total amount of capital dedicated to railways was many multiples of the actual cost of the railways themselves.

Thanks folks. I stand corrected. Wikipedia.

‘By the 15th century, English law awarded limited liability to monastic communities and trade guilds with commonly-held property. In the 17th century, joint stock charters were awarded by the crown to monopolies such as the East India Company.

It became more straightforward to incorporate a joint stock company following the Joint Stock Companies Act 1844, although investors in such companies carried unlimited liability until the Limited Liability Act 1855.’

“Rogoff’s point is that it would be better to face the arithmetic now rather than later. ”

Oh! You mean that those of us who have been mentioning the logical outcome of [income – debt] being a little bit negative, using plain vanilla math, have been correct all along. Math does not lie, but mathematicians may – and do!

@ KC: “The west has run on the model of the limited liability company since elizabethan times which presumed that the world has unlimited resourses – expect people and institutions to start eating each other if they remain on a exponential debt model when there is no more worlds to conquer.”

This is the first time I have encountered (on this site anyway) an exposition of our ‘growth’ model for economic development. No need to sweat the ‘small stuff’. Its that nasty little bit about debt and its exponential growth that is the ticking bomb. There is one sure way out of this global debt predicament: Cram down all debts and attempt a cold re-start.

You can of course continue with the present course and risk an eventual social upheaval. Hungry folk have a nasty habit of smashing things.

What I hear and observe is that the only way to pay down one’s debt – is to take on a further burden of credit (aka: exponentially growing debt). What have I missed?

Presumably some of you contributors, like myself, have from time to time been in a position where your current income is significantly less than your outstanding borrowings. “What is to be done?” Just spend less. Unpleasant, but it works – on a personal level. Just be real careful how you extrapolate this mode of action to an entire country.

Now if the Irish economy is 50% reliant on ‘consumption spending’, and this turns down by 10%. What compenstates? Whence the ‘jobs’? The current econ model mandates consumption, but how can you sustain consumption if your income is impaired. Oh! Just use your Credit Card! Methinks there is a lack of meaningful intellectual engagement with this matter.


@Brian Woods
A central bank may decide to replace credit with money as Ben Bernanke is doing with QE 2 although in a circular fashion – redeeming interest to the treasury- this maintains the money supply and unlike QE1 – the money flows to the goverment directly.
Ben B is essentially engaging in a emergency greenback solution – however a large part of the shadow bank sectors liabilities have to be written off so that enough surplus can be used to engage in REAL capital production – the CBs have not done this yet.

@ KC: Thanks for comment. Some of the US commentators are almost apoplectic about BB’s carry-on. The lack of capital accumulation to invest in productive (as opposed to financial ponzi schemes) returns is particularly annoying them. The housing foreclosure problem is still festering and there is an emerging mortgage securitization scam which has just reached the courts. The aggregate US deficit for fiscal 2011 is being est at USD 1.7 trillion!!! Should be fun soon.


@Ketith Cuneen
““The west has run on the model of the limited liability company since elizabethan times..”
In the Innovation section (sorry can’t find it online) in todays IT there is a piece by William Cohan – author of House of Cards and former employee of JP Morgan.
The gist is that while the big partneship Investment companies in Wall St were still partnerships they were forced into prudent dealing by the extent of their personal exposure. Initially in 1970 DLJ went public and was followed one by one by all the big Wall st firms as they saw that ” the new corporate legal structure would shield them from the liabilities – up to their entire net worth – which they faced on a daily basis as a general partner.”

Thus the rise of the bonus culture in Wall St where instead of being rewarded for generating profits these bankers are now rewarded for generating revenue. Up to 60% of gigantic revenues are paid

His conclusion is similar to that of Mihael Lewis that the combination of public flotation of the old “prudent” financial services partnerships and the bonus culture which they use to poket the mjor part of the revenuse leads to the creation of ever more complicted and obscure derivative and other products to enrich themselves. At the same time the too big to fail status sheilds the bankers from any risk.

Since nothing has changed since the 2007/2008 crash he says they are busy building yet another bubble right now.

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