What happens when a country doesn’t pay its debts?


Can they just ignore the debt like it never existed? Are there real reprucussions for the government or impacts to the econony?

In: 467

Depends on who’s holding that debt. If it’s the country’s citizens, then defaulting on that debt will undermine the citizens’ confidence in the government and its financial institutions thus affecting the economy. If it’s foreign governments or institutions, then they can impose sanctions and make demands until the debt as paid or restructured.

Sovereign Debt Crisis is what to google.

The immediate thing that happens is a bond market crash. Everyone who owned that country’s bonds is suddenly out all of their money. That can cause a contagion crisis elsewhere. Those wiped out investors often owe money other places and this leads to further defaults. If it’s a small country, it might be contained but if it’s a large country like the United States, the whole world financial system would melt down.

A follow up problem is the country in question would have big problems taking on any debt going forward (who would buy it?). So if they are running any deficits, they would need immediate budget cuts to stay afloat. Bear in mind, the bond market crash will cause a decrease in the wealth of the country’s people which will cause a decrease in tax revenue which will increase their budget deficit.

So, it’s really bad. No one would ever do this on purpose.

Most sovereign governments can, in theory, ignore their debts and default. The repercussions will depend on who lent the government the money.

It is extremely likely that no private investor or enterprise will consider lending more money (in the short term). They might go so far as to cease or curtail lending to private enterprises in that country due to perceived instability and unreliability of the government. It is also likely the currency will devalue and there will be little incoming investment.

This makes it very difficult to do international trade. If the country relies on imports, it might find itself needing to pay upfront in a foreign currency. This is unsustainable. If few people buy their exports, foreign currency reserves will eventually run out. To trade, there is a need for at least a minimal framework of trust to allow transactions to occur.

Practically speaking, the country will probably have high inflation, lack of essential imported goods, any production that relies on importing goods will be severely impacted. The economy will shrink and the population might see high unemployment, declining quality of life, capital flight and also their most skilled people leaving the country. In the worst cases, social unrest, political upheaval, violence & crime increases, refugees fleeing the country etc etc.

In short, yes, there are usually huge repercussions if a government defaults on it’s debts.

Similar to a person who doesn’t pay of their debts, they will find it very hard, or more expensive to borrow in the future. But also with a lot more ramifications, depending on size. But it does happen. African developing countries tend to have higher interest rates when they borrow because they’re seen as not as stable as developed countries, and so they might just not pay back their debts. But it happens to rich countries as well, here in the UK we defaulted on our debts in the 70’s, and had to be bailed out by the IMF, which made our interest higher for the next decade or so, and the US recently a couple of times, has come close to defaulting (not because they couldn’t pay, but for political reasons, debt ceilings and closing of government for some reason, I’ll need an Americans help to fully explain) the repercussions of that would have been very bad, as the US dollar is used around the world as the backup or pegged currency, both officially and unofficially. Greece tried to ignore its debts during the Euro crisis, but realised that the repercussions would be disastrous, and eventually accepted austerity instead.

Governments sell Bonds to banks, other countries, I vestments funds etc. Bonds are basically loans, and the givt pays them back at a certain interval and rate. If a govt, company or whatever defaults on there Bonds, these buyers lose trust that they will ever get their money back, and new investors will also not trust them. The value of the bonds will plummet, and the ability for the Gov’t to raise new funds will get drastically harder.

For a Gov’t that runs deficits, that means the govt will risk going bankrupt, or have to massively reduce its spending. Since govt spending is on things for the people, that means the people get screwed, and you get civil unrest or revolution. The military budget would get slashed, putting the country at risk to its enemies.

Overall a sovereign debt default causes massive problems.