A sovereign default ( ) is the failure or rejection of a sovereign state government to repay its debt in full. Termination of payments due to payment (or accounts receivable) may be accompanied by a formal declaration (refusal) from the government to not pay (or only partially repay) the debt, or may not be announced. Credit rating agencies will consider the capital, failure, failure, and procedural errors, failure to comply with the terms of bonds or other debt instruments. Countries sometimes escape the real burden of some of their debt through inflation. This is not a "default" in the usual sense because the debt is respected, albeit with a less real currency value. Sometimes governments devalue their currencies. This can be done by printing more money to apply for their own loans, or by ending or converting their currency convertibles into precious metals or foreign currency for a fixed price. More difficult to measure than an interest or a capital default, this is often defined as an external failure or procedure (contract) from the terms of the contract or other instrument.
If prospective lenders or bond buyers begin to suspect that the government may default on repaying its debt, they may demand high interest rates as compensation for the risk of default. The dramatic rise in interest rates faced by the government for fear that it will fail to honor its debt is sometimes referred to as the government's debt crisis. Governments may be particularly vulnerable to the sovereign debt crisis as they rely on financing through short-term bonds, as this creates a mismatch situation between short-term bond financing and the value of long-term assets from their tax base.
They are also vulnerable to the sovereign debt crisis due to currency mismatches: if some bonds in their own currency are received abroad, and therefore the country mainly issues foreign-dated bonds, a decline in the value of their own currency can make it expensive. to repay their foreign-denominated bonds (see original sin).
Because the sovereign government, by definition, controls its own affairs, it can not be required to repay its debts. Nevertheless, the government may face severe pressure from lender countries. In some extreme cases, major creditor countries, prior to the establishment of the UN Charter Article 2 (4) prohibit the use of force by the state, create a threat of war or wage war against the debtor country for failing to repay the debt to confiscate assets to enforce its creditor rights. For example, the British invaded Egypt in 1882. Other examples included the "diplomacy of the United States" ships in Venezuela in the mid-1890s and the US occupation of Haiti began in 1915.
Currently the default government can be widely excluded from further credits, some of its foreign assets may be seized; and may face political pressure from its own domestic bondholders to repay its debt. Therefore, governments rarely fail in all their debt values. Instead, they often negotiate with their bondholders to approve a delay (debt restructuring) or a partial reduction of their debt (a 'haircut or write-off').
Some economists argue that, in the case of acute insolvency crisis, it may be advisable for regulators and supranational lenders to preemptively design a country's public debt restructuring on a regular basis - also called "regular default" or "controlled default". In the case of Greece, these experts generally believe that delays in setting up regular defaults will be more detrimental to other Europeans.
The International Monetary Fund often lends to the restructuring of government debt. To ensure that funds will be available to pay the remaining portion of the state debt, have made such loans dependent on actions such as reducing corruption, imposing austerity measures such as reducing unprofitable public sector services, increasing tax revenues (income) or rarely suggesting forms - other forms of income increase such as the nationalization of economic sectors that are not feasible or corrupt but profitable. The latest example is a Greek bailout deal in May 2010.
Video Sovereign default
Cause
According to financial historian Edward Chancellor, past examples of default sovereignty are likely to occur under some or all of the following circumstances:
- Global capital flow reversal
- Lack of lending
- False lendering
- Excessive overseas debts
- Bad credit history
- Unprofitable loans
- Rollover Risk
- Weak earnings
- Rising interest rates
- Terminal debt
Significant factors in government default are the significant debts paid to foreign investors such as banks that can not obtain timely payments through political support from the government, supranational courts or negotiations; the enforcement of creditor rights to sovereign states is often difficult. Such deliberate failure (equivalent to a strategic bankruptcy by a company or a strategic standard by a mortgager, except without the possibility of exercising normal creditor rights such as asset seizure and sale) may be considered a variety of sovereign theft; this is similar to a takeover (including insufficient payments for leading domain implementation). Some also believe that government failure is the dark side of globalization and capitalism.
Insolvency/oversupply from the state
If a country, for economic reasons, fails to fulfill its treasury obligations, or is no longer able or willing to handle debt, liabilities, or pay interest on this debt, it faces a government default. To declare bankruptcy, it is sufficient if the state is only able (or willing) to repay a portion of interest on maturity or to remove only a portion of the debt.
Reasons for this include:
- massive increase in public debt
- job decline and therefore tax revenue
- government regulations or alleged threats of financial market regulation
- people's anxiety on austerity measures to repay debt completely
State accidents caused by bankruptcy have historically always arisen at the end of long years or decades of overspending, in which the state has spent more money than it receives. The balance/margin of this budget is covered through new debts with citizens and foreigners, banks and states.
Iliquidity
The literature suggests an important distinction between illiquidity and insolvency . If a country is temporarily unable to meet the interest payments or principal payments that are pending because it can not dispose of sufficient assets, it "fails to pay due to illiquidity". In this concept, the standard can be solved as soon as the "temporarily illiquid" asset becomes liquid again, which makes the liquidity a temporary state - in contrast to bankruptcy. The weakness of this concept is that it is almost impossible to prove that assets are only temporarily illiquid.
Change of government
While usually the government changes do not change the responsibility of the state to handle the obligations of treasury made by the previous government, but it can be observed that in a revolutionary situation and after the regime change the new government may question the legitimacy of the previous, and thus default on treasury obligations is considered odious debts.
Important examples are:
- the French debt default of Bourbon after the French Revolution.
- the default bonds through Denmark in 1850, issued by the Holstein government established by the German Confederation.
- the debt default of the Russian Empire after the Soviet government came to power in 1917.
- the United States Confederate State's denial by the United States after the Civil War through the ratification of Section 4 of the Fourteenth Amendment.
Decrease status
With the state's downturn, its obligation is left to one or more successive countries.
Missing the war significantly speeds up the sovereign default. Nevertheless, especially after World War II, government debt has risen significantly in many countries even during the long period of peace. While initially the debt is small enough, because the compound interest and continued overspending have increased substantially.
Maps Sovereign default
Debt payment approach
There are two different theories about why sovereign states pay back their debts.
Approach reputation
The reputation approach establishes that countries assess access to international capital markets as they enable to smooth consumption in the face of volatile output and/or fluctuations in investment opportunities. This approach assumes no external factors such as legal or military action because the debtor is a sovereign state. Debtor countries with a bad reputation will lack access to this capital market.
Penalty approach
The punitive approach establishes that the debtor will be punished in some form, whether by legal action and/or military power. Creditors will use legal and/or military threats to see their investment return. Penalties can prevent debtors from being able to borrow in their own currency.
Consequences
The state creditor as well as the economy and citizens are influenced by the default of sovereignty.
Consequences for creditors
Direct costs to creditors are the loss of principal and interest payable on their loans to a default country.
In this case very often there are international negotiations that ended with the cancellation of some debts (London Agreement on Germany's Foreign Debt 1953) or debt restructuring (eg Brady Bonds in the 1980s). Such agreements guarantee partial payments when the rejection/transfer of most of the debt is received by the creditor. In the case of Argentina's economic crisis (1999-2002) some creditors choose to accept rejection (loss, or "haircut") of up to 75% of unpaid debt, while others ("holdouts") choose to await governance change (2015) for a better compensation offer.
For debt indebtedness purposes can be distinguished from creditor nationality (national or international), or by currency of debt (own currency or foreign currency) and whether the foreign creditors are private or state property. Countries are often more willing to cancel debts to foreign private creditors, unless the creditor has the means of retaliation against the state.
Consequences for country
When a state fails on debt, the state discards (or ignores, depending on the point of view) of its financial obligations/debts to a particular creditor. The immediate effect for the state is the reduction of total debt and the reduction of payments on the debt interest. On the other hand, defaults can damage the reputation of the country among creditors, which can limit the ability of countries to get credit from the capital market. In some cases, foreign lenders may try to undermine the monetary sovereignty of the debtor country or even declare war (see above).
Consequences for its citizens
If an individual citizen or a corporate citizen is a state creditor (eg a government bond), then the default by the state can mean the devaluation of their monetary wealth.
In addition, the following scenarios may occur in the debtor country of a sovereign default:
- banking crisis, because banks have to make write downs on credits granted to the state.
- economic crisis, as interior demand will fall and investors withdraw their money
- currency crisis as foreign investors avoid this national economy
The debtor's citizens may feel the impact indirectly through high unemployment and decline in state services and benefits. However, a sovereign monetary state can take steps to minimize negative consequences, rebalance the economy and advance social/economic progress (eg Plano Real).
Solution
With the reputation of the Big Three - Standard & amp; Poor, Moody's and Fitch Group - have come under fire since the 2008 financial crisis, many have questioned their assessment methods. Marc Joffe, former Senior Director at Moody's and now Principal Consultant at Public Sector Credit Solutions (PSCS), recently argues that economists and other academic social scientists, through logit and probit econometric models, are better equipped than rating agencies to assess standards the risks of the authorities and the municipality. To support better ranking methods, the PSCS (in partnership with Wikirating) maintains a comprehensive public database of government defaults, revenues, expenses, debt levels, and debt service costs. The PSCS has also developed the Public Sector Credit Framework, an open source budget simulation model that helps analysts assess the probability of default.
Example of sovereign default
The failure of a country to meet the payment of bonds has been seen on many occasions. Philip II of Spain failed in debt four times - in 1557, 1560, 1575 and 1596 - became the first country in history to declare a sovereign failure due to rising military costs and declining gold values, as it has become increasingly dependent on revenue flowing from its trade empire in America. This sovereign default threw the German banking houses into chaos and ended the Fuggers' reign as Spanish financiers. The Genoese bankers provided a heavy Habsburg system with smooth credit and steady fixed income. In return, unreliable US silver shipments were quickly transferred from Sevilla to Genoa, to provide capital for further military endeavors.
In the 1820s, some Latin American countries that had just entered the bond market in London failed. The same countries often fail during the nineteenth century, but the situation is usually quickly resolved by renegotiating loans, including the partial removal of debt.
Failure to meet payments became common again in the late 1920s and 1930s; because protectionism by rich countries is increasing and international trade is down especially after the banking crisis of 1929, countries that have debt in other currencies find it increasingly difficult to meet agreed terms in more favorable economic conditions. For example, in 1932, Chilean repayments exceeded the country's total exports (or, at least, exports below current prices; whether the price reduction - forced sales - would enable fulfilling the unknown creditor's rights).
Recently Greece became the first developing country to fail to pay the International Monetary Fund. In June 2015, Greece defaulted on a $ 1.7 billion payment to the IMF.
See also
- Incompatible asset liability
- Country Bond
- Debt crisis
- External debt
- The currency crisis
- Financial crisis
- Payment balance
- Dana Vulture
References
- D. Andrew Austin (2016), Has the US Government Ever "Failed"?
- Guillermo Calvo (2005), Turmoil Developing Capital Market: Bad Luck or Bad Policy?
- Barry Eichengreen (2002), Crisis Finance: And What To Do About Them .
- Barry Eichengreen and Ricardo Hausmann, eds., (2005), Other People's Money: Debt Denomination and Financial Instability in a Developing Market Economy .
- Barry Eichengreen and Peter Lindert, eds., (1992), International Debt Crisis in Historical Perspective .
- M. Nicolas J. Firzli (2010), Greece and Roots the EU Debt Crisis .
- Charles Calomiris (1998), 'Blueprint for the new global financial architecture'.
- Reinhart, Carmen M.; Rogoff, Kenneth S. (2009). This Time Is Different: Eight Centuries of Financial Folly . Princeton University Press. ISBN 978-0-691-14216-6.
- Jean Tirole (2002), Financial Crisis, Liquidity, and International Monetary System .
Quotes and notes
- Quote
- Notes
External links
- List of premium Swap Credit Default from various countries.
Source of the article : Wikipedia
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