Sovereign
default – Wikipedia
Since a
sovereign government, by definition, controls its own affairs, it cannot be
obliged to pay back its debt.[3] 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;[4] 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