Recently I just read about Sri Lanka going bankrupt so what happens next?
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Most probably the government will be changed due to economic crisis.
New government takes most of the debt. They will be financed by IMF and UN.
This is a very complex thing to describe in an ELI5. Each case will have their own specifics. Countries don’t go bankrupt like companies or individuals because they cannot run out of their own currency since they can print as much of it as they choose. A “bankrupt” country is one where the government runs out of foreign currency. Foreign currency is needed to pay debt borrowed and to facilitate trade ie if a country wants to buy stuff from another country, they have to pay in a foreign currency.
What happens next is that, for most countries, the first agency that comes to their aid is the IMF. The IMF gives emergency loans to prevent the local currency from getting out of control. (It is a Monetary Fund). The IMF will help the country renegotiate their debt in return for policy changes (ie the government should not waste the money loaned to it by the IMF).
The next step is usually, but not always, the World Bank or similar. This organization might help out with longer term funding or for certain development projects undertaken by the government usually if there are poverty alleviation projects.
Internally, it is more challenging. Many (democratic) governments that go bankrupt are voted out of office. The citizens don’t like governments that go broke. In the best circumstances the new government undertakes economic reform etc etc. In the worst cases, even the IMF cannot do much and the country spirals into violence and civil unrest.
In many cases, the IMF and World Bank (and other aid organizations) try to provide enough funding to avoid outcomes like mass hunger, complete collapse of the economy and/or rapid increases in poverty but that is sometimes only possible after some time in a pretty bad situation. The actual economic steps vary by country.
When a country spends more than it makes it needs to borrow money, usually from foreign governments and banks, or from its own citizens by selling bonds. This debt has to be repaid over a specified period of time just like any other loan. If the country still does not have enough money to make the scheduled repayments then it ‘defaults’, or goes bankrupt.
When this happens, it can either:
1. Request to borrow additional money from the International Monetary Fund (assuming nobody else wants to keep lending money).
2. ‘Print’ and create more currency and use that to repay its debt.
It’s usually a combination of both options, but the first one is not guaranteed and comes with very strict terms.
The second option, which seems like a simpler solution, creates a big problem. The local debt can be repaid in local currency, but it is usually a small part of the debt. The foreign debt however has to be repaid in foreign currency (FC). And if you exchange a large amount of local currency for FC reserves which are limited, its price will go up due to supply and demand of each. This leads the devaluation of the local currency making it worth less and less the more you buy and requiring the country to print more and more in an endless cycle.
But that’s not the end of it. All this local currency that has been printed to repay local debt and buy foreign currency is now circulating inside the country. Great, right? WRONG. This increase in devaluating currency directly leads to an increase in prices because anything imported becomes more expensive. So now you have a dangerous combination of devaluation and inflation which makes the problem even worse. Argentina is a good example.
So is there any way out of this? Outside of reducing spending, which is easier said than done since most bankrupt countries have a large part of the population living in poverty who need government spending to pay for basic needs, there is one “positive” side-effect.
A devaluating currency means that anything produced inside the country becomes cheaper for the rest of the world. So policies that facilitate exports, attract investors, or even tourism, to take advantage of this can help quite a bit. But inflation always catches up with devaluation so this isn’t a long term solution and you have to be able to attract foreign investments with other incentives than just “things are cheap here.”
Debt is cancelled and creditors are not happy because they lost money.
This leads to various pressure to recoup the money. That can lead to another country invading or blockading you. Or sometimes no one does anything and nothing happens, except debt vanished.
I’m Sri Lankan and there are great answers here already. To add to them, I recommend y’all visit r/srilanka to get a grasp of how this affects the day to day lives of Sri Lankans
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