Can they just ignore the debt like it never existed? Are there real reprucussions for the government or impacts to the econony?
In: 467
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.
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