eli5 Why it’s bad for country to default on it’s debt?
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Imagine you and I are countries. I ask to borrow 10 candy bars today with an agreement that I’ll give you 11 candy bars tomorrow. This is a 10% rate of return. You think I’m trustworthy, you were not going to eat those 10 candy bars anyway and like the idea of ending up with an extra candy bar (profit on your loan). We sign a little contract and I take my candy bars.
The next day you come to me to retrieve the candy bars but I don’t have them. I’ve defaulted. You lost 10 candy bars instead of gaining 1.
Next month again I ask to borrow 10 candy bars. First you say, “get lost” — you refuse to lend me anything because I’ve demonstrated I can’t be trusted. Perhaps I can convince you to lend, but it’s going to be a smaller loan and a higher rate of return. Perhaps you lend me one candy bar but I have to give you three tomorrow for you to accept my terms.
It’s bad to default because you may be refused credit (no one will lend to you) and the rate (aka cost of borrowing) increases dramatically.
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