What happens when a country defaults?

HovaBaby

I hear the word thrown around, but I am not sure of the meaning.

Can someone please explain the meaning to me.

(Moderators: I felt like asking the question here because it is the politics forum and i'd like a detailed answer, thus I didn't post this topic in a language forum and ask only for a basic definition. I also feel a lot of people might know know exactly what the word entails.)

sheesh

A state/ country has borrowed money from one of those big banks or it has sold bonds on the bond market and then it says it cannot pay back the money on these loans or bonds.

or else it says to the banks that it cannot pay back all the money and there is a negotiated settlment where they do not pay back all the money.

you might remember that Iceland Defaulted its loans to some UK banks they put it to a vote and the country voted not to pay the money back.


Irelands situation is different the anglo and aib debt were originally not national debt but became national debt. Appearently Jean Claud Trichet insisted that even the unsecured debt of anglo and AIB had to be paid back.

ILikeBananas

It's when a country cannot or will not repay its debts. At that stage the country will find itself unable to borrow money from abroad and so will have to immediately balance its income and expenditure.

In Ireland's case there is a 12 Billion Euro excess of spending over income so if we were to default it would mean massive cuts to welfare, public sector wages and capital expenditure along with increases in taxation.

In our case we would also probably decide to/be forced to leave the Euro. A new currency would likely devalue instantly meaning that savers would see a large chunk (30% seems to be a common estimate) of their money wiped out. Loans such as mortgages would still be in Euros meaning that people would find it almost impossible to repay them given their new lower incomes. So, mass mortgage defaults would likely be another result which would likely kick off another banking crisis.

Scofflaw

ILikeBananas wrote: »

It's when a country cannot or will not repay its debts. At that stage the country will find itself unable to borrow money from abroad and so will have to immediately balance its income and expenditure.

In Ireland's case there is a 12 Billion Euro excess of spending over income so if we were to default it would mean massive cuts to welfare, public sector wages and capital expenditure along with increases in taxation.

In our case we would also probably decide to/be forced to leave the Euro. A new currency would likely devalue instantly meaning that savers would see a large chunk (30% seems to be a common estimate) of their money wiped out. Loans such as mortgages would still be in Euros meaning that people would find it almost impossible to repay them given their new lower incomes. So, mass mortgage defaults would likely be another result which would likely kick off another banking crisis.

Which we'd have all to ourselves, instead of pretending it was someone else who made us do it. Sheer nationalism would keep us all warm, though - all that dancing at the crossroads.

For the OP, yes, the above. Unsurprisingly, if you default on debt - that is, fail to repay it on time, or, much worse, fail to repay it in part or in full - you find it very difficult to borrow any more. Most countries will go through a lot to avoid this situation, because even once you've balanced your budget - which in our case would involve c.€15bn in cuts/tax rises all at once - it means you have absolutely no recourse if there's any future difficulty.

cordially,
Scofflaw

arodabomb

ILikeBananas wrote: »

In our case we would also probably decide to/be forced to leave the Euro. A new currency would likely devalue instantly meaning that savers would see a large chunk (30% seems to be a common estimate) of their money wiped out. Loans such as mortgages would still be in Euros meaning that people would find it almost impossible to repay them given their new lower incomes. So, mass mortgage defaults would likely be another result which would likely kick off another banking crisis.

Out of interest, how does this work. People routinely state that should a new currency come into play, then any savings people had in Irish banks that were in euros would be converted into the new currency. Yet, debts people have with the same banks would remain in euros?

And should the euro collapse, would both the debts and the savings in irish banks be converted into the new currency?

nesf

arodabomb wrote: »

Out of interest, how does this work. People routinely state that should a new currency come into play, then any savings people had in Irish banks that were in euros would be converted into the new currency. Yet, debts people have with the same banks would remain in euros?

When you take out a loan you sign a contract to pay back in a particular currency. The only way this currency can be changed is if you and the bank agree on doing it and apply a particular conversion rate to the loan. A Government on the other hand can unilaterally declare all savings as being converted into Punt Nua if it so wishes.

later12

I have to disagree with the implication that Ireland would have to balance its budget overnight.

In fact, no default is likely to be so messy as to be of a 'hard' (forced) AND require us to immediately balance our books.

The chances are that if Ireland does default on its sovereign debt it will still have access to emergency credit via central European funds - in the form of a loan - with or without the eurozone staying together.

And we shouldn't exaggerate the economic precedence here. Some defaulters have found their way back into sovereign capital markets after a few months depending on the PV of their debt, which in our case we should hope would be high. And the chart below shows that in such cases, the charges demanded on their debentures are not always altered astronomically.



It's not that anybody should encourage default, but we shouldn't dismiss it as a doomsday scenario either. Its real effects ought to be considered calmly.

nesf wrote: »

A Government on the other hand can unilaterally declare all savings as being converted into Punt Nua if it so wishes.

Well that depends on whether the break up of the Eurozone would be a partial exit by the peripherals or complete break of the bloc. At the moment one would have to observe that the former appears more likely than the latter.

Our Government, in their brave and infinite wisdom, would possibly do what you describe above, but it would be a foolish decision. What would be the point? You and I would simply take a cheap IR£1,000,000 ticket to Paris, and start a run on the Irish banks from a Charles de Gaulle Terminal 1

If Ireland and the other peripherals are ever escorted from the Eurozone area, it is in our best interest to prove Gresham's Law quite wrong and to 'Euroize' Ireland much in the same way that Latin America is Dollarized. Our two currencies should just trade side by side, with the Euro trading at a premium of course.

K-9

later10 wrote: »

The chances are that if Ireland does default on its sovereign debt it will still have access to emergency credit via central European funds - in the form of a loan - with or without the eurozone staying together.

Would that not depend on it being an agreed default rather than an unilateral default? If the Eurozone breaks up I wonder how iron cast the fund is?

later12

K-9 wrote: »

Would that not depend on it being an agreed default rather than an unilateral default? If the Eurozone breaks up I wonder how iron cast the fund is?

In the context above I was referring more to the loan coming from the E.U, or the relicts of the Eurozone in informal union at least.

In that ideal world, Ireland would have a fixed exchange rate post exit and would be the recipient of such credit from the core. It's not in anybody's interest in Europe to see the EU as well as the Eurozone be compromised.

If Ireland unilaterally defaulted on its sovereign debt, and the Eurozone broke up, and no money was forthcoming, don't forget we would be capable in theory of monetizing part of our deficit in the short to medium term.

Balancing the books overnight is not a likely possibility whatever which way you look at it.

K-9

later10 wrote: »

In the context above I was referring more to the loan coming from the E.U, or the relicts of the Eurozone in informal union at least.

In that ideal world, Ireland would have a fixed exchange rate post exit and would be the recipient of such credit from the core. It's not in anybody's interest in Europe to see the EU as well as the Eurozone be compromised.

If Ireland unilaterally defaulted on its sovereign debt, and the Eurozone broke up, and no money was forthcoming, don't forget we would be capable in theory of monetizing part of our deficit in the short to medium term.

Balancing the books overnight is not a likely possibility whatever which way you look at it.

I was referring to the EU loan myself too. It's reviewed every 3 months I think, so a default might mean default of the agreement as well and no future funding. I think assuming future funding will still be forthcoming is a big assumption and probably unlikely.

I suppose if the Eurozone goes there probably isn't much incentive for a Eurozone fund anymore. As you say though our debt would be cut. Hard to know if we'd get funding at below 6%, probably be more dependent again on the IMF and even their funding could be in doubt!

nesf

later10 wrote: »

Well that depends on whether the break up of the Eurozone would be a partial exit by the peripherals or complete break of the bloc. At the moment one would have to observe that the former appears more likely than the latter.

Our Government, in their brave and infinite wisdom, would possibly do what you describe above, but it would be a foolish decision. What would be the point? You and I would simply take a cheap IR£1,000,000 ticket to Paris, and start a run on the Irish banks from a Charles de Gaulle Terminal 1

If Ireland and the other peripherals are ever escorted from the Eurozone area, it is in our best interest to prove Gresham's Law quite wrong and to 'Euroize' Ireland much in the same way that Latin America is Dollarized. Our two currencies should just trade side by side, with the Euro trading at a premium of course.

I said can, not should or would.

RichardAnd

ILikeBananas gives a pretty succinct description of what could happen. It would, in short, be an economic disaster.

However, I would be more interested in the social implications of such a thing. If mortgages imploded, wages crashed and inflation soared, it's likely that the average joe might come to realise something about the financial system . . . it's one big game of make believe.

Sadly, alot of the billions and trillions we hear about never actually did exist outside of a computer's memory. The modern concept of money only works when we buy into the idea that it has a value. If the system that propagates that belief dies, then it will take the money ideal with it. If this happens, it's probably that people will revert to some sort of barter system to get their needs. Or perhaps, they will just decide to take it and if that happens, we're in a dangerous place.

Scofflaw

RichardAnd wrote: »

ILikeBananas gives a pretty succinct description of what could happen. It would, in short, be an economic disaster.

However, I would be more interested in the social implications of such a thing. If mortgages imploded, wages crashed and inflation soared, it's likely that the average joe might come to realise something about the financial system . . . it's one big game of make believe.

Sadly, alot of the billions and trillions we hear about never actually did exist outside of a computer's memory. The modern concept of money only works when we buy into the idea that it has a value. If the system that propagates that belief dies, then it will take the money ideal with it. If this happens, it's probably that people will revert to some sort of barter system to get their needs. Or perhaps, they will just decide to take it and if that happens, we're in a dangerous place.

"Make-believe" is a bit of a pejorative way of putting it. One could equally well say that like nearly everything worthwhile in human society - and human society itself - it's based on trust, both in each other and in the future.

Modern economies, in which people regularly do business with people they don't know, from shopkeepers to websites, are based on trust. That's one of the reasons that those who have difficulty with trust are consistently of the opinion that it's all going to come crashing down any moment, because they can't see what on earth keeps any of it going.

cordially,
Scofflaw

Permabear

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