Eli5 How does defaulting on debt effects a country?

Question

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?

In: 17

Answer 1

Countries dont live in a void.

They trade with other countries, and for that they need to exchange their local currency for a external banking corrency, Dollar, Euro, Yuan, Ruble…

also countries have to finance public works, products, spending, the idea is that if everything goes well, the money comes back in the form of taxes, tarrifs, levys,

You build a road, people use those roads to take their goods to the markets, or go to work, so they generate wealth which they pay taxes on,

Or you build a port, so people export and import stuff, that means customs tarrifes, it means more jobs since you´re manufacturing, it means jobs in the dock.

so countries take on loans, they can be external loans from international banks, world bank, IMF,

They can be internal loans, like issued goverment bonds anyone can buy.

Now if the goverment fails to repay these loans it can bring upon several effects.

– Your currency becomes worthless on an international market since its not trusted and theres no backing for it, so its hard to buy euros, dollars, yuans… so importing becomes very hard.

– No one will buy your debt, so future financing becomes very hard, basically no one will loan you money.

– your external reserves and goverment property aboard can be repoed, usually diplomatic property (embassy and consulate equiptment and vehicles) are protected by diplomatic immunity, but other goverment property like imports awaiting delivery, millitary equiptment, private planes, currency and precious metal reserves in forigne banks, stuff like that can be expropriated. there was a case with Christina Kitchner, President of argentina at the time which had to take commercial flights becuase if she took the official presidental plane outside argentina, it would be expropriated. then again Argentina is a never ending cycle of corruption.

TL;DR : basically your money becomes worthless, no one loans you money ever again, and any of your property that goes outside the country can be expropriated.