Eli5: What is a default in the Economy ?
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Countries take out loans and usually this is actually a good thing, so long as there aren’t too many loans and the country is able to pay them back.
(Almost?) every country’s government raises money by allowing others – people, institutions, even other governments – to give it loans which it then promises to pay back. This is on top of other means it has to make money, such as taxes, tariffs, and printing its own money.
The more such loans a country takes out, the more money it has to spend paying interest on those loans. If there isn’t enough money to spend on whatever the government needs to spend it on, then the country can raise taxes or other fees, print more money, or take out even more loans.
Now usually, all of these are preferable to the final option, which is to declare “I’m unable, or unwilling, to pay back the loans I took out”. The government usually has every right to do that. You can write a loan to your government and they can turn around and say “What loan?” but by doing so, they damage their credibility and make it far less likely that anyone will write them a loan in the future.
Sometimes this is unavoidable. For example, the Greek debt crisis of 2007 was caused by Greece borrowing so much money that the nations giving them that money demanded the Greeks reorganize their economy in such a way that they would have a chance of paying it all off. Since so much of the “value” was leaving the country to pay off all that debt, their own economy tanked. Unemployment was high and wages were low meaning that raising taxes wouldn’t be effective, and Greece was using the euro by that point so they couldn’t unilaterally print money like they could if they had their own currency.
Sometimes it is avoidable but the country explicitly chooses to not pay back its loans. In 1918, Russia, having undergone a communist revolution, announced it would not honor the debts that the previous government owed.
In 1998, Russia had transitioned back to capitalism but its economy was flailing with very high levels of unemployment and inflation, meaning that taxes and even more money printing weren’t good choices. Rather than undergo the sort of austerity measures that were forced on Greece by its international creditors, Russia’s legislature (dominated by communists who were very skeptical of foreign agencies like the IMF who would have been writing them the loans) announced that it would default on its foreign debts while doing its best to pay what it owed to Russian creditors. Fortunately, a spike in oil prices in the following years, plus some benefits of a worthless currency (everything is super cheap when you sell your stuff abroad) allowed the country to recover and eventually pay off the remaining loans, restoring foreign creditors’ trust that any loans they wrote to Russia in the future would actually be repaid.
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