In this week’s New Yorker, Nick Paumgarten, in the Talk of the Town, kindly draws on my work about the cultural contingency of financial reporting; he quotes me on the need to update the idea of insolvency. Usually defined as the ability to pay debts as they come due, or assets exceeding liabilities, there has always been a strong objective thrust to the notion. The emphasis is on measured financial activity reduced to a verifiable expression of ability.
But as Nick notes, equally important is a debtor’s will to pay. The differences appear in the contrast between the United States and Greece.When Standard & Poor’s recently lowered its credit rating of the U.S. Treasury by one notch, it registered doubt not so much about the country’s ability to pay its debt, but the will of its incumbant political class to do so. In contrast, Greece’s political elite seem committed to finding ways to meet that country’s debts; alas, its resources compared to its obligations raise real doubt about their ability to do so.
Another example of the difference between the ability and the will to pay debts arose in the September 2008 tussle over what to do about American International Group. It was then the world’s largest insurance company and shortly before the crisis boasted a market capitalization of $180 billion. Much of its trillion-dollar balance sheet was securely housed in walled-off insurance subsidiaries. Read More