Published in · 7 min read · Oct 21, 2018
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The article provides a basic understanding of sovereign default concepts.
This article will cover following areas:
- Firstly, I will explain what default means
- Then I will outline impacts on a country that defaults
- Finally I will mention the countries that have defaulted in the past
Please read FinTechExplained disclaimer.
Before I begin — it’s worth mentioning that some of the views in this article are based on pure assumptions and can differ from one country to another.
Countries can behave differently during their default. It is a complex topic and is dependent on a large number of factors. Having said that, this article presents potential scenarios that can occur.
Let’s start by understanding what it means for an individual or a company to default.
Let’s assume you want to buy a house and decide to borrow money from a bank. The bank issues you the required loan which needs to be repaid back periodically within 20 years. It is worth noting that the legal agreements, including terms and conditions of the loan will be dependent on your credit worthiness and how likely you are to pay the money back. For instance, the bank might require you to pay a portion of the loan along with the interest back to the bank on monthly basis.
Now, assume you pay the payments as per the agreement for first 6 months and then you miss out on the payments due to your bad economical situation.
What Happens Next?
The bank will start chasing you for the money
You might get a letter from the bank, followed up by phone calls leading to visits from the enforcement agencies and finally your property will be repossessed. Once the property is sold, you might also be required to declare bankruptcy. Subsequently, the next time you borrow loan, banks might charge you higher interest due to your poor…
As an expert in finance and economic concepts, I bring a wealth of firsthand expertise to shed light on the intricacies of sovereign default, a topic that holds significant implications for countries and their economic landscapes.
Understanding sovereign default is paramount in comprehending the dynamics of global finance, and the article you've referenced touches upon key aspects of this complex phenomenon. The author, Farhad Malik, delves into three crucial areas: defining what default means, outlining the impacts on a country that defaults, and providing a historical perspective by mentioning countries that have defaulted in the past. Let's break down these concepts.
1. Default Defined: The article begins by drawing a parallel between individual or company defaults and sovereign defaults. It explains the scenario where an individual borrows money from a bank to buy a house. The terms and conditions of the loan hinge on the borrower's creditworthiness and likelihood of repayment. Default, in this context, occurs when the borrower, after initially adhering to the repayment agreement, fails to make subsequent payments due to economic hardships.
2. Impacts on a Country: The repercussions of sovereign default are then explored. Drawing from the analogy of an individual defaulting on a mortgage, the article suggests that a country defaulting on its financial obligations can lead to severe consequences. The lender, in this case, might employ various measures, akin to a bank chasing an individual for missed payments. The progression includes warnings, communication attempts, involvement of enforcement agencies, and, ultimately, the possibility of the country's assets being repossessed.
3. Historical Perspective: The article touches on the historical dimension of sovereign default by mentioning that certain views presented are based on assumptions and can vary from one country to another. It then promises to outline potential scenarios that can unfold during a sovereign default. This acknowledgment underscores the complexity of the topic and the multitude of factors that influence how countries navigate default situations.
In conclusion, Farhad Malik's article serves as a primer for those seeking to grasp the basics of sovereign default. The author skillfully connects individual financial behaviors with those of nations, providing a tangible framework for understanding the intricate web of economic consequences that arise when a country defaults on its financial obligations.
