Countries’ debts are usually in the form of bonds, with specific payback periods and interest rates. What they often do is issue new bonds as old ones mature. So while the debt might remain the same size or grow, that doesn’t mean they’re ignoring it or not paying it off according to the terms. As long as they pay back bonds as they mature and can meet the interest payments of the bonds currently held by investors, then it’s OK.
When countries start defaulting on bonds, refusing to pay interest or principal owed to investors, that’s when it becomes a major issue. In addition to such a move signaling economic issue that will harm the entire economy, it also prevents the government from being able to borrow again as investors will not want to get burned, and will look elsewhere to invest.
They fall into what’s known as the debt trap.
The lender arm twists the borrower into accepting more debt with even more unfair terms or straight up starts using the project they financed as the lender’s private property.
Eg. China has funded and helped build a port in Sri Lanka, now that Sri Lanka is unable to pay back so now the Port is owned by China now.
https://www.livemint.com/opinion/columns/chinas-sri-lankan-port-grab-adds-a-pearl-to-its-string-11622393656645.html
China swoops in and “helps them” with infrastructure to boost their economy. Next thing they know China is making crazy ass political claims and is giving the country they just helped a wink wink nudge nudge *you better agree and back us up or you’re gonna lose that shiny new highway system we just built you.*
So it’s worth asking who they owe debts to. Quite a lot of government debt is owned by foreign countries but a lot of it is also owned by its citizens in the form of bonds.
In the UK people can buy Premium Bonds, for each bond owned they have a chance to win a cash prize each month. So if a government didn’t pay it’s debts it would be the citizens who lose out.
Where a foreign power owns the debt it plays out a little differently. There is often no direct consequence of not paying debts but the country that owns that debt may put punishing tax duties on products imported from that nation, they may up the cost of products they send to it. It could result in that country having less bargaining power on the world stage. These can have a knock on effect on the countries economy and result it price inflation or shortages for the public.
Others have explained the technical consequences. What I’ve noticed happens from my admittedly brief studies of international political economy is that the IMF swoops in like carrion birds and holds the country ransom, promising bail-out funds in exchange for restructuring the country’s economy (and usually implementing severe austerity measures). This usually ends up privatizing industries and paves the way for multi-national corporations to set up shop. While direct foreign investment of multi-nationals can be a good thing, those companies are usually only interested in exploiting a desperate populace.
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.
They default on the debts they acquired, the lenders will go to an international arbitration tribunal that will surely freeze as many international assets as they could to restitute the lenders. The country’s bond (how most countries get money) will be worth nothing, nobody will lend that country money, and no sane private company will make deals with them.
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