What does defaulting of a country means and what follows next?
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Assuming you’re discussing loan defaults, although it may sound nitpicky, it is the government of the country that defaults. There are going to be many companies that continue to operate in the country even though the government defaults on their loans.
A country defaults when their foreign reserves (foreign currency owned by the government) is depleted and is the country no longer has the ability or willingness to pay back loans that it has taken. For smaller and less developed countries, it might be forced to take loans where repayment has to be in foreign currencies (like USD, Euro, etc)
What follows next is very case by case since every situation is different. Very broadly, most countries are members of the IMF (international monetary fund). Because many countries rely on imported goods like medicine and energy, it is important to have these imports continue to avoid humanitarian crisis. The IMF steps in and provides emergency funding so that essential materials continue to be sent to the country.
This is usually followed by negotiations. Often with the IMF, the government and the people who have lent the government money negotiate new terms for existing loans, loan forgiveness, more aid, new loans etc. In return, very often, the government has to agree to change some policies – usually to avoid running out of foreign currency.
What follows next is probably unpleasant. The country probably has their currency value fall which raises inflation for their citizens. The government may have to curtail welfare spending and social benefits or privatize parts of their economy (ie sell some assets to raise money) Even in the best circumstances, the disruption and uncertainty usually means a recession and higher unemployment.
Defaulting on debt means that they do not pay some of it back when it is due. A country have debt in form of bonds. These are called government bonds, treasury bonds, liberty bonds, war bonds, and many other names. Some of these bonds are sold abroad but not many. Most of them end up being sold to citizens who are looking for very safe investments. You can buy government bonds directly if you want but in general the money you pay to a savings bank account, insurance company, pension fund, collage fund, union strike fund, etc. then most of this money will be spent buying government bonds. Either directly or indirectly it ends up getting owned by mostly middle class citizens. Rich people have enough money to invest all of their cash in stocks as they will still be wealthy in case of a market crash. And very poor people do not have money for any government bonds.
So if the government defaults on its debt the first you will discover is that your paycheck might be late or end up bouncing. The companies likely bought bonds with the money set aside for the wages but now the government will not pay the money back so they can pay their workers. You try to withdraw money from your bank account but does not work either as the bank is also waiting on the government to pay out on the bonds. Generally it does not look good for the economy in the country.
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