For instance recently Srilanka defaulted and i would like to understand how has their situation changed after the default announcement as compared to how it was lets say a month before the default?
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The way most international trade is conducted, financial instruments don’t actually change hands. That is, if a country asks for three million dollars in food aid, the lender doesn’t transfer three million dollars into a bank account somewhere; instead, it’s (generally) part of a package of inter-government trade and investment deals and import/export arrangements that runs its course over a few months or years.
A country that defaults on its obligations will often find it harder to negotiate future trade agreements with their lenders, or re-negotiate existing deals; they haven’t completed their end of the current deal, and chances are they won’t be able to do so for a long time, so the terms of a new arrangement are likely to be less favorable for them.
In terms of the actual effect defaulting will have on a country’s economy: in the short term there won’t be that much of a problem; prices for various commodities may rise a bit, imports may be a bit more expensive, and export tariffs may be placed on certain goods so the government can collect some money and start paying off their debts through trade.
In the longer term, it gets a bit more problematic. You can’t just keep slapping tariffs on everything forever, and *nobody* likes having to pay higher taxes for any longer than necessary. Your international colleagues *may* choose to forgive *some* of your debt, but probably not *all* of it, and again, they’re probably not going to be willing to give you such a good deal the next time you come to the negotiating table.
That’s about as ELI5 as I can get. 🙂
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