I was thinking about the Greek crisis. As I understood it they were given extensions and more loans. But what would happen if that option isn’t available? Time for a war?
In: Economics
When a government can’t pay its debt obligations there’s three options:
1) Take on even more debt! Issue higher-yield bonds to pay the ones that just came due. This makes the problem worse… for the next administration.
2) Default. Nobody can *make* you pay without military force, but know that nobody will ever trust your bonds again. Borrowing will forever be difficult and costly until there’s major government change.
3) Print the cash! Greece couldn’t do this because they’re no longer using their own currency, but the UK and the US (and Venezuela) can. You make the money by literally making the money, which makes all the existing money worth less. Governments typically try to devalue the currency like this 1-2% a year, but irresponsible or desperate governments go nuts and crank out trillion dollar bills to vaporize their debt – and your savings.
In the past it would have led war, now it’s just that nobody trusts you and you wouldn’t be able to secure a loan in the future. Following the financial crisis Iceland defaulted on their loans to predominantly British and Dutch stakeholders but very little was done about it.
I mean, defaulting on your debts understandably makes people pretty wary of lending to you.
With respect to governments. Most that default end up having to put through serious spending reforms and really signal that their fiscal house is in order for several years before they can borrow at reasonable interest rates again.
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