Can they just ignore the debt like it never existed? Are there real reprucussions for the government or impacts to the econony?
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It depends on what type of debt.
In broad strokes you can say there are three types:
*1. When a country borrows in a different countries currency*.
This is the most dangerous.
When a country defaults: The foreign banks start sueing and seizing assets. New loans become impossible to get. Foreign trade becomes more difficult. Shortages on goods. The domestic currency looses value for trade. Inflation sets in. Every case of hyper inflation has occurred under this condition.
*2. When a country borrows in it’s own money but does not control it*.
All of the countries in the E.U. fall into this category. When Greece came close to default it didn’t really threaten the strength of the Euro. It also didn’t stop Greek businesses from foreign trade. It did cause the Greek government to drastically reduce spending leading to a deep and painful recession.
*3. When a country borrows in it’s own money and does control it*.
Japan is a good example of this.In this case a government borrows money from itself in a process more akin to printing money than debt. In this situation a government never really defaults when it can’t pay it’s bills it just loans itself some more money and keeps on spending. Basically the same as if you or I had an unlimited credit card and were allowed to pay it off using the same card. The danger of this is that a country is stuck constantly printing more and more money causing slow creeping inflation.
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