Sovereign default – Wikipedia
Since a sovereign government, by definition, controls its own affairs, it cannot be obliged to pay back its debt. Nonetheless, governments may face severe pressure from lending countries.
Today a government which defaults may be widely excluded from further credit, some of its overseas assets may be seized; and it may face political pressure from its own domestic bondholders to pay back its debt. Therefore governments rarely default on the entire value of their debt. Instead, they often enter into negotiations with their bondholders to agree on a delay (debt restructuring) or partial reduction of their debt (a 'haircut or write-off').
The Economist explains: What happens when a country goes bust – The Economist
Most countries have defaulted at least once in their history. But what precisely happens when countries stop paying what they owe?
Sovereign Debt Restructurings 1950–2010: Literature Survey, Data, and Stylized Facts – IMF
Udaibir S. Das, Michael G. Papaioannou, and Christoph Trebesch
This paper provides a comprehensive survey of pertinent issues on sovereign debt restructurings, based on a newly constructed data base. This is the first complete dataset of sovereign restructuring cases, covering the six decades from 1950–2010; it includes 186 debt exchanges with foreign banks and bondholders, and 447 bilateral debt agreements with the Paris Club. We present new stylized facts on the outcome and process of debt restructurings, including on the size of haircuts, credit or participation, and legal aspects. In addition, the paper summarizes the relevant empirical literature, analyzes recent restructuring episodes, and discusses ongoing debates on crisis resolution mechanisms, credit default swaps, and the role of collective action clauses
Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten – IMF
Carmen M. Reinhart and Kenneth S. Rogoff
Even after one of the most severe multi-year crises on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.
This is what happens when countries default on their debts – BI
The 1980s oil price shock caused widespread defaults in South America, hitting banks hard and freezing affected countries out of international credit markets * Europe's crisis 2010-present saw default risk transferred from banks to taxpayers * The lessons of history are that support for troubled economies is important, but so too is the ability to restructure debt