What Happens If A Country Defaults?

[12DrinkMore]

It has never happened but the economies of a few countries in Euroland are looking shaky.

But what happens if a country in the EUR goes bust?

They cannot resort to printing cash or devaluation. How would they pay the public sector wages and pensions? What happens to the bank guarantees?

Ireland have already announced that they will be cutting wages to keep the bills down.

Presumably the up to an extent the other countries will rally around and bail them out by lending money. But in the end, would they also crank up the printing press in the same way as Brown? I can't see the Germans agreeing to it. The IMF does not have limitless funds, and these already come from the member nations.

Could a country be forced, either by the EU Union or by its own decision just to leave Euroland and unilaterally ditch its debts? Presumably the country would try to issue its own currency, but unless the population agree there would still be massive holding of Euro in personal hands. I suppose the horror scenario is that suddenly overnight all bank accounts would be frozen, converted to the new currency and then have this floated.

Could it happen?

California is also on the brink, but that is once again in USD and the FED will doubtless prop them up by printing a few USDs.

Edited January 22, 2009 by 12DrinkMore

[chiang mai]

It will be helpful to specify a particular country because the actions taken will be almost certainly be different based on that factor alone, presumably you have the UK in mind?

[12DrinkMore]

It will be helpful to specify a particular country because the actions taken will be almost certainly be different based on that factor alone, presumably you have the UK in mind?

The UK is NOT in the EUR and so different rules apply.

I specifically mentioned EUR members and what would happen if one, or two or three went bankrupt.

[pkrv]

I think the question would be better phrased as 'defaulted on loans'. A US city (I forget which one) defaulted on its loans to the UK. China has defaulted on the US in the past I believe (the US were most irrate, and really did not see the irony, the US tried moral grounds to get its money back and failed).

The UK did demand that China repay some debts for some default or other or would not be allowed to trade on the UK exchanges, I think that worked, but my knowledge is sort of by the by on this subject.

I think the answer to your question is not much actually.

There is no mention in the press of the UK defaulting on loans is there? - Probably you are just hearing crap.

Edited January 22, 2009 by pkrv

[12DrinkMore]

I think the answer to your question is not much actually.

There is no mention in the press of the UK defaulting on loans is there? - Probably you are just hearing crap.

The UK is a special basket case because it can issue GBPs until all debts have been paid, irrespective of the value of the GBPs.

The particular case I had in mind is Ireland, where I have a chunk of money with a recently nationalised bank. So what happens if Ireland defaults on its debts? presumably it could also say that it is not paying out on the depositors' guarantee.

But what happens next?

[Naam]

What Happens If A Country Defaults?

It has never happened

says WHO? if you had to invite me and pay for a dinner including champagne and caviar in a good restaurant for each time a country defaulted on its debt i wouldn't go hungry for several months and you'd be most probably bankrupt

[Naam]

The UK is a special basket case because it can issue GBPs until all debts have been paid, irrespective of the value of the GBPs.

UK can issue GBP to service GBP debt but neither USD nor EUR to service its external debt not denominated in GBP. worthwhile to add is that UK's external debt in other currencies is very low.

[mot2102]

didnt russia default under boris yeltsin??

[Naam]

didnt russia default under boris yeltsin??

a tricky question. Russia did not default on its own bonds but on bonds which were issued based on restructured debt of the Soviet Union. those bonds (PRINs and IANs) were again restructured in 1999 (default was in 1998) and the bondholders who accepted the restructuring and the new bonds balanced their losses and made a nice profit just three years later.

[MattFS218]

Countries have defaulted before, like in Argentina in the 90's. Usually the IMF offers the country loans in exchange for political and economic reform. Just like in an individuals personal bankruptcy, creditors will join with other relevant parties and decide how much of the debt will simply be erased, of course future borrowing is greatly hindered.

In the euro area, when a euro area country fails other member euro countries not explicitly not granters on the failed state's loans. Credit spreads of euro debt used to be about the same, but since the credit crisis hit, loans from Italy, Spain, and Greece have been sold at greater spreads, meaning higher risks.

[CWMcMurray]

But all of the above are examples of individual countries. If an EU member defaults I believe it would have different rammifications.

So what happens if in the above example, Ireland dafaults?

What are the rammifications to Ireland?

Will this have any effect on the EUR?

What effects will this have on the EU as a whole and other member countries of the EU?

[MattFS218]

But all of the above are examples of individual countries. If an EU member defaults I believe it would have different rammifications.

So what happens if in the above example, Ireland dafaults?

What are the rammifications to Ireland?

Will this have any effect on the EUR?

What effects will this have on the EU as a whole and other member countries of the EU?

Last I checked countries in Europe are individual countries, in-fact it's why Americans like me always believe that nothing ever gets done in Europe because of the lack of consensus.

Ireland gets closed to defaulting, they ask the IMF for loans. IMF says we'll give you a loan, but you must raise your taxes, cut your government budgets, etc. If they refuse, the money, they will eventually default on a loan. Governments issue loans all the time, some at higher rates than others. American government debt is the highest quality, while other emerging market debt is rated lower.

Ireland defaults because it cannot pay the loans made to it. The creditors that own the debt find the value of their loans cut, and Ireland finds it dam_n near impossible to get loans in the future.

Again, euro area states are NOT guaranteers of other Euro states debt, and thus are not at all required to help. Hope this helps.

--matt

[johnnyk]

Countries don't want to default, its the last resort when nothing is left but total economic chaos.

They simply cannot meet their debt obligations. If they default it is next to impossible for them to raise money on international markets (issuing bonds which are basically IOUs) which is where countries have to go to get loans for big projects.

Would you lend money to a bankrupt who had stiffed other people? Nope.

[Naam]

Countries don't want to default, its the last resort when nothing is left but total economic chaos.

They simply cannot meet their debt obligations. If they default it is next to impossible for them to raise money on international markets (issuing bonds which are basically IOUs) which is where countries have to go to get loans for big projects. Would you lend money to a bankrupt who had stiffed other people? Nope.

i beg to differ because you are obviously not aware what is going on in the real world.

Ecuador (OPEC member) defaulted in the 80s, restructured its debt under the "Brady" system (loss for creitors 30%) early 90s, defaulted again 1999, restructured its debt in 2000 (loss for creditors 35%) and has JUST NOW DEFAULTED AGAIN. Argentina is a similar case. but the greed of investors is immense. shortly after the default money again poured into these countries and i bet my [not so] sweet butt that in a year or two Ecuador will find enough dummies again to buy its bonds.

[jubby]

UK can issue GBP to service GBP debt but neither USD nor EUR to service its external debt not denominated in GBP. worthwhile to add is that UK's external debt in other currencies is very low.

I Knew the UK was in debt but hadn't thought about which currency the debt was in. Do you have figures/percentages ?

I suppose it would be wishful thinking to hope the debt was mainly in GBP

[cecco]

After Russia loaned money to Vietnam, and Vietnam couldn't pay the money back, Russia went to Vietnam and took the debt out in educated students who went to Russia and worked as cheap educated labor in the factories, allowing Russia to compete better with her products.

America has been doing this a long time, and expect to see more peace corps, volunteer corps, youth corps, Ameriacorps, Eurocorps, etc in the USA and other governances as well, including more police states, and states more policed. Things are going to get very draconian (signifying a rule unflinchingly severe).

The money has to come from somewhere, and money is no longer going to be currency, it will me marketable commodity, and the most easily transported are human beings.

It has never happened but the economies of a few countries in Euroland are looking shaky.

But what happens if a country in the EUR goes bust?

They cannot resort to printing cash or devaluation. How would they pay the public sector wages and pensions? What happens to the bank guarantees?

Ireland have already announced that they will be cutting wages to keep the bills down.

Presumably the up to an extent the other countries will rally around and bail them out by lending money. But in the end, would they also crank up the printing press in the same way as Brown? I can't see the Germans agreeing to it. The IMF does not have limitless funds, and these already come from the member nations.

Could a country be forced, either by the EU Union or by its own decision just to leave Euroland and unilaterally ditch its debts? Presumably the country would try to issue its own currency, but unless the population agree there would still be massive holding of Euro in personal hands. I suppose the horror scenario is that suddenly overnight all bank accounts would be frozen, converted to the new currency and then have this floated.

Could it happen?

California is also on the brink, but that is once again in USD and the FED will doubtless prop them up by printing a few USDs.

[Naam]

I Knew the UK was in debt but hadn't thought about which currency the debt was in. Do you have figures/percentages ?

I suppose it would be wishful thinking to hope the debt was mainly in GBP

i don't have exact figures but concluded that UK external debt denominated in currencies other than GBP must be very low for the simple reason when checking available bonds one doesn't find too many. that applies of course to sovereign debt only. debt of UK corporates in various currencies is HUGE.

[MattFS218]

After Russia loaned money to Vietnam, and Vietnam couldn't pay the money back, Russia went to Vietnam and took the debt out in educated students who went to Russia and worked as cheap educated labor in the factories, allowing Russia to compete better with her products.

America has been doing this a long time, and expect to see more peace corps, volunteer corps, youth corps, Ameriacorps, Eurocorps, etc in the USA and other governances as well, including more police states, and states more policed. Things are going to get very draconian (signifying a rule unflinchingly severe).

The money has to come from somewhere, and money is no longer going to be currency, it will me marketable commodity, and the most easily transported are human beings.

Interesting comment. I've never heard of this happening before, and I doubt it would happen now because human trafficking is a big no-no.

The US does try to attract the brightest of the bright from countries around the world, but I don't think it's to repay bad debt. The US gains a lot from these bright students. America offers a proven education system, and the "American Dream". These immigrants bring needed (esp now) tax revenue, and contribute to society. Happens all the time in India.

--matt

[Naam]

After Russia loaned money to Vietnam, and Vietnam couldn't pay the money back, Russia went to Vietnam and took the debt out in educated students who went to Russia and worked as cheap educated labor in the factories, allowing Russia to compete better with her products.

The money has to come from somewhere, and money is no longer going to be currency, it will me marketable commodity, and the most easily transported are human beings.

Interesting comment. I've never heard of this happening before, and I doubt it would happen now because human trafficking is a big no-no.

the comment is interesting, i agree although... the comment is nothing but pure rubbish

[Pakboong]

The US defaulted in 1971 when France wanted gold for their dollars.

[Naam]

The US defaulted in 1971 when France wanted gold for their dollars.

correct!

[henryalleman]

Countries have defaulted before, like in Argentina in the 90's. Usually the IMF offers the country loans in exchange for political and economic reform. Just like in an individuals personal bankruptcy, creditors will join with other relevant parties and decide how much of the debt will simply be erased, of course future borrowing is greatly hindered.

In the euro area, when a euro area country fails other member euro countries not explicitly not granters on the failed state's loans. Credit spreads of euro debt used to be about the same, but since the credit crisis hit, loans from Italy, Spain, and Greece have been sold at greater spreads, meaning higher risks.

There is always the ECB. When the Fortis bank almost collapsed the Belgian government asked the ECB to provide the money, late at that night the money was send by trucks before the bank opened.

Furthermore a country of the Eurozone can't do what its wants regarding deficit, or debts. There are limits set by the EU. If the they like to have an deficit higher than the limits they must ask permission from the EU comission, and pay a fine.

The EU set very stringent rules for countries who like to enter the Euro zone. They must not only have a low deficit and debt rate but must also adjust their whole economy to the Euro Zone.

Presume that the UK like to enter the Euro zone it will be probably rejected this moment.

IMHO its virtualy impossible that a country in the Euro zone will leave because the effects for the country will be desastreus

I think there is a lot of misunderstanding about the EU monetary politics in the EURO zone.

So I give some links.

http://www.eubusiness.com/Euro/euro-guide/

http://www.neurope.eu/articles/91842.php

http://www.welt.de/english-news/article306...imate-test.html

[geriatrickid]

Have a look at Iceland. Interest rates jacked up, austerity measures, a government in chaos and alot of spoilt folks that can't believe the party is over.

You can't really raise personal income taxes too high, or the super wealthy and folks with transportable skills that pay those taxes leave. You end up losing far more than you would gain. That means cutting back on services. Imagine the UK with further cuts to the NHS, increased fees, less development investment and cutbacks in foreign aid. labour and the unions would have a fit.

Cutback on policing and there is anarchy in the streets. Cutback on defense and you have the country over run by illegals trying to sneak in, or attacking foreign assets. It costs money to protect those tankers getting attacked off of Somalia etc. I'd say, brace for some severe austerity measures.

Alot of European nations were in tatters after WWII, but they pulled through. True, there was the Marshall plan and the generosity of the Americans but even so, Europe had to do alot of it on its own. My understanding was that England from 1945 to 1955 was a rather grim place to live which is why so many talented people emigrated to Canada, South Africa, USA and Australia. However, it's a different generation now without their grandparents' stiff upper lip, so it might therefore be in the national interest of Australia and Canada to bail out England if they don't want an influx of effete pommies complaining about either the heat or cold or the absence of bland greasy food.

[MattFS218]

There is always the ECB. When the Fortis bank almost collapsed the Belgian government asked the ECB to provide the money, late at that night the money was send by trucks before the bank opened.

Furthermore a country of the Eurozone can't do what its wants regarding deficit, or debts. There are limits set by the EU. If the they like to have an deficit higher than the limits they must ask permission from the EU comission, and pay a fine.

The EU set very stringent rules for countries who like to enter the Euro zone. They must not only have a low deficit and debt rate but must also adjust their whole economy to the Euro Zone.

Presume that the UK like to enter the Euro zone it will be probably rejected this moment.

IMHO its virtualy impossible that a country in the Euro zone will leave because the effects for the country will be desastreus

I think there is a lot of misunderstanding about the EU monetary politics in the EURO zone.

So I give some links.

http://www.eubusiness.com/Euro/euro-guide/

http://www.neurope.eu/articles/91842.php

http://www.welt.de/english-news/article306...imate-test.html

The ECB did not bail out Fortis bank, the Belgium, Neatherlands and Luxenberg governments did (http://uk.biz.yahoo.com/080929/214/i7mxn.html). There are penalties for countries in the eurozone who run deficits greater than 2% of GDP, but in reality the enforcement is lax, at best. In fact I think Germany and France the 2 major countries adopting the euro both have consistently run deficits over the maximum in recent years.

It's rather easy for a country to depart from the eurozone, as local political pressure might require them to do so. This has been discussed by politicians in Italy recently. It's politics, when people loose their jobs, and the economy can't be kick started by monetary policy, the benefits of the euro are outweighed by it's costs.

Don't be fooled, there's no greater "ECB" backing of eurozone sovereign debt, and I doubt the euro will fair any better than the dollar in this crisis.

[Naam]

Don't be fooled, there's no greater "ECB" backing of eurozone sovereign debt, and I doubt the euro will fair any better than the dollar in this crisis.

correct! in fact the EU charta explicitly forbids any intervention in case a sovereign member is in financial difficulties. that is notwithstanding any assistance available from the IMF, Worldbank, etc.

if some backing existed then the government bonds of Greece, Italy and Spain would not yield 30-50% more than german government bonds.