eli5 Why it’s bad for country to default on it’s debt?
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It more often hurts the people of the country, not always the country itself, because the people always pick up the slack. If a government defaults on a loan, then they can’t borrow as much as they used to be able to for pet projects. This typically means the gov either has to cut programs or increase taxes just to keep the existing programs at the current level. If they cut programs, the people who needed them suffer. If they increase taxes, usually one of 2 things happen. Either: A. The gov increases income tax which means the average person takes home less money, which means they have less to spend, so the gov gets less in sales tax meaning the gov will still have to take corrective action in the future (either more taxes or less programs) OR B. The gov raises corporate tax, which usually means, especially if the gov just defaulted but not always, that the corporations will increase their prices to offset the new tax increase, meaning the people still pay for the debt.
The problem with increasing corporate tax after a default is that when the businesses have to increase prices to offset the new tax, they are more than likely already adding to the existing inflation, because the national bank will want to print more money to help pay for the debt, while simultaneously businesses are increasing prices, creating a potentially high risk situation for hyper inflation.
Long story short, it is in the common man’s best interest for their nation to pay it’s debt, no matter how you look at it.
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